Written evidence from DefenceSynergia
DEFENCE INDUSTRIAL
STRATEGY - SOME
THOUGHTS
INTRODUCTION
1. The UK is in the process of restoring its
finances following a major recession that has burdened the economy
with an excessive level of structural debt - circa £157 billion
has been quoted. In these circumstances the new Coalition Government
has rightly accorded the tackling of this debt crisis top priority.
However, the Government is also on record as having a preference
for an export led recovery spearheaded by commercial and industrial
growth.
2. This makes economic sense, especially as it
will be essential to keep unemployment as low as possible in order
to prevent benefit payments spiralling out of control and consuming
tax receipts that could be better spent elsewhere stimulating
growth. The knock on effects of a steady growth in GDP being an
increase in overall tax revenues and stable interest rates at
levels that do not add to the debt repayment burden.
3. One of the major contributors towards this
aspiration for an export led growth strategy are the defence related
industries. These "high-tech" manufacturers supported
by supply chain industries employ circa 300,000, mainly high skilled
workers, exporting 22% of output - in 2006 this represented some
£4.7 billion out of a total turnover of £21.9 billion.
Putting the UK defence industrial complex 10th in a league table
of 27 major exporting areas. (NB data from NAO/DASA/Oxford
Economics)
4. Within the Armed Forces themselves there has
been much soul searching as the needs of Iraq /Afghanistan have
required excessive use of the Urgent Operational Requirement system.
This in turn, coupled to the long running nature of these war
operations, has led to a new paradigm where for the first time
money to pay for ongoing operations is not coming from the strategic
reserve but being placed as a burden upon the core defence vote
without a compensating increase. Indeed, this may also be the
case for the Trident replacement. When viewed from the perspective
of the past decade of underfunding for defence as opposed to some
very kind years for budgets such as education and health the situation
between government departments is hardly comparable.
5. Indeed, the Chairman of ADS made the following
comments at the end of his mainly supportive response to a recent
speech by the Secretary of State for Defence, he said this:
"Although defence should contribute to
solving the current financial difficulties, Dr Fox would be justified
in looking around the Cabinet table to challenge other departments
to match the contribution to budget savings that defence has already
made over the last two decades. Defence spending is half the percentage
of Government spending and of GDP that it was twenty years ago.
Other departments, where budgets have grown substantially over
the same period, should be challenged in the same manner before
more is asked of defence given that the demands on our Armed Forces
exceed what was originally planned within the current budget."
MAIN DISCUSSION
6. It is taken as a given that the first priority
of Government is defence of the realm and that the instrument
through which this policy is primarily guaranteed is the Armed
Forces. It is also accepted by all reasonable people that the
size, structure and composition of these forces will always be
constrained by the available finance. However, this restriction
can, has and does remain flexible, most especially when the security
and independence of the nation are directly threatened. Not least
alone when threats are identified and quantified by reviews of
both domestic and foreign policy - as now in the Strategic Defence
and Security Review (SDSR).
7. The question is how, in financially straightened
times, to pay for the personnel and equipment identified as priorities
by the SDSR? Indeed, should they be funded at all? The answer
from most defence lobbyists is a resounding yes to the second
question but fraught with less certainty and confusion in respect
of the first. The latter often being expressed by politicians,
and increasingly by media and service pundits, in the form "
we would like to bolster defence but just can't in the current
financial climate". The "dismal Jimmy" approach.
8. So it is incumbent upon everyone involved
to examine all options most especially those that offer a positive
and pragmatic solution based on mutual benefit to the country
as a whole. One such solution offers a dual track by strengthening
defence and at the same time providing the impetus to assist the
economy to recover. Albeit anathema to HM Treasury - by increasing
spending in support of defence budget projects thereby stimulating
other commercial areas in the UK. The top 10 of these according
to an "Oxford Economics" report from 2009 are in order
of size by total turnover:
Motor Vehicles employing 272,000 workers, Construction
employing 2,356000 workers,
Pharmaceuticals employing 129,000 workers, Telecommunication
employing 270,000 workers, Banking and Finance employing 559,000
workers, Manufacture of steel employing 106,000 workers, Manufacture
of electrical components employing 50,000 workers, Manufacture
of machine tools employing 30,000 workers, Manufacture of apparel
employing 53,000 workers and Defence directly employing 160,000
workers (another 145000 in related defence supply chain activity).
9. In 2006 only Pharmaceuticals on the list above
invested more in R&D than the defence industries (£7.42 billion
versus £2.39 billion) and only Motor Vehicles, Banking,
Pharmaceuticals and Steel exports exceeded those of the defence
industries (£22.10 billion, £18.38 billion,
£14.59 billion, £12.64 billion and £4.70
respectively). In fact when "Oxford Economics" collated
the available data in respect of all UK's major commercial and
industrial areas they concluded that defence ranked 3rd out of
27 in the UK behind publishing and machine tool manufacture. This
is what they said:
"The outcome ...is that the strongest economic
case (excluding capacity considerations) for increasing Government
investment in order to stimulate the economy can be made for the
publishing, machine tools and defence sectors, as these sectors
have the three lowest average rankings. However, once capacity
is taken into account, the case for supporting the defence sector
is strengthened, as it has greater spare capacity than the other
sectors.
This study has examined a wide range of benefits
which can accrue from an increase in Government investment within
a sector. While immediate impacts are necessary to help the economy
exit recession, any investment must also take into account its
possible longer term impacts, through its support of R&D and
export intensive industries. To be effective an investment needs
to be aimed at industries that can absorb an increase in demand;
if an industry is running at full capacity the increased investment
will merely add to future orders, and any immediate benefits from
investment will be lost. As a result investments need to be targeted
in such a way that their positive impact is balanced between short
term and long-run benefits, and a sector has the capacity to ensure
that its benefits are felt immediately and are not delayed until
capacity becomes available".
10. This reference to "Capacity" is
perhaps the crux of the issue as an industrial led economic recovery
will depend upon both short and long term returns for any Government
investment. In the case of the UK's defence industrial complex
it has been acknowledged that spare capacity already exists -
according to the CBI and EUROSTAT surveys on industrial trends
the defence industry in the UK is currently running below capacity.
The later being influenced by the irregular nature of demand
in the defence sector accustoming it to increasing production
rapidly in order to meet client procurement targets. This assessment
was confirmed in the "Oxford Economics" study which
indicated that of the eleven sectors for which capacity data were
available, the defence sector ranked 3rd in the UK for spare capacity
to allow for rapid expansion.
11. It is this investment leading to rapid expansion
that is the key to producing short term but sustainable growth
in the economy, not least by increasing "high-tech"
employment opportunities for directly and indirectly employed
labour. For every job created in the defence industry, "Oxford
Economics" estimate that 1.6 jobs are created elsewhere in
the economy. Therefore, a notional £100 million investment
in the defence industry will create 1,885 jobs throughout the
UK economy, 726 of which will be in the defence industry itself.
This could equate to 18,850 new jobs for every £1 billion
invested before other theoretical economic multipliers are applied
in respect of reductions in unemployment payments, local economy
boosts from wages earned and the extra tax revenues accrued from
incomes, corporate taxation and boosted exports.
12. "Oxford Economics" do not say what
the negative effects on the economy and defence industries might
be if the decision of the Treasury were to reduce MoD's ability
to invest in and sustain its current level of contract activity.
One can speculate that the loss of confidence will lead to redundancies,
a fall in exports, a reduction in R&D expenditure and the
inexorable decline of this area of manufacturing and innovation.
The long term affect being to emasculate one of the UK's most
successful wealth generating areas of expertise. As the economy
recovers more slowly - and recover it will - the British Armed
Forces may have to look evermore to overseas companies for the
hardware it requires with the knock on consequences to the balance
of payments and employment prospects at home. Once the capacity,
infrastructure and expertise to build ships, aircraft and sophisticated
weapons platforms is lost it will be difficult to regain - probably
financially impossible.
CONCLUSION
13. The UK is experiencing a financial debt crisis
and is slowly emerging from recession. The Coalition Government
has rightly set its first priority to reduce the debt burden but
at the same time has indicated that it wishes private industry
and commerce to lead the way to recovery through increased domestic
and export growth. Nevertheless, the Treasury has taken the view
that major cuts in public expenditure are still necessary as current
forecast rates of growth are insufficient in themselves to alleviate
the debt burden within a reasonable time-frame.
14. To this end all departments of state (excepting
overseas aid and the NHS) are being tasked to save between 20-40%
of their departmental budgets. A huge ask. Within this stricture
the MOD has been tasked to find 20% savings from financial year
2011-12 despite having been starved of funds over a decade or
more.
15. However, with an SDSR due to report in the
Autumn and its results uncertain other than they should be foreign
policy and threat led, there is a case for exempting the defence
budget from any cuts until after the review. To do otherwise is
to "situate the appreciation" and chance the UK's security
and manufacturing base for purely fiscal reasons. That the MoD
must put its own house in order and operate in the most cost effective
way possible is not disputed, nor is the possibility that the
UK Armed Forces may have to be restructured to meet the requirements
identified by SDSR. Only the motivation of those responsible for
financing our Armed Forces and the logic employed is in doubt.
16. But there is a way forward being suggested
by those most closely associated with the economics of the defence
industrial complex. They offer a methodology that links the future
of the British Armed Forces inextricably with the defence industries
(and vice versa) and one that directly supports the wider UK economic
recovery. The thesis suggests that there is no need to cut the
British Armed Forces further than the identified threats indicate
they should be sized, structured and equipped and that Government
investment in the various defence and support industries will
pave the way for economic recovery whilst at the same time providing
for robust and appropriate security of the United Kingdom.
18. For HM Treasury, who have responsibility
to ensure sound public finances, there is another clear imperative
- "the first duty of any Government is defence of the
realm and its people". But, although it is the Government
that leads in this process it is the people who populate the defence
industries and Armed Forces to whom politicians must ultimately
answer. In this latter respect it is the duty of Government to
ensure that the Armed Forces and their supporting industries are
viable and credible and therefore capable enough to deter an aggressor.
Deterrence always costs far less in lives and treasure
than war.
16 August 2010
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