Annex: How much extra money for Defence would result from an increase in its percentage share of GDP?
Measuring GDP is not a precise science and what 3% of GDP might yield in terms of actual expenditure would depend on differing GDP growth rates over a given period. Nevertheless, it is possible to offer some outline figures to help understand what a 3% commitment might represent in cash terms.
The following table is an illustrative representation of the extent of Government expenditure that could be available to Defence at ranges from (the current) 2% of GDP up to 3.0% of GDP over the next five years, set against a range of assumptions that GDP might grow by anything from 1.0% to 2.5% during that period.
HM Treasury’s summary of independent forecasts predicts the most likely GDP growth scenario for the immediate future as around a 1.5%.166
Defence Expenditure as a Varying Percentage of GDP in Four Extrapolations of GDP Growth
167|
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
||
|
GDP Growth at 2.5% |
£2,000bn 167 |
2050 |
2101 |
2154 |
2208 |
2263 |
|
|
3.0% Def |
60 |
61.5 |
63 |
64.6 |
66.2 |
67.8 |
|
|
2.5% Def |
50 |
51.2 |
52.5 |
53.8 |
55.2 |
56.5 |
|
|
2.0% Def |
40 168 |
41 |
42 |
43 |
44.1 |
45.2 |
|
|
GDP Growth at 2.0% |
£2,000bn |
2040 |
2081 |
2123 |
2165 |
2208 |
|
|
3.0% Def |
60 |
61.2 |
62.4 |
63.6 |
64.9 |
66.2 |
|
|
2.5% Def |
50 |
51 |
52 |
53 |
54.1 |
55.2 |
|
|
2.0% Def |
40 |
40.8 |
41.6 |
42.4 |
43.3 |
44.1 |
|
|
GDP Growth at 1.5% |
£2,000bn |
2030 |
2060 |
2091 |
2122 |
2154 |
|
|
3.0% Def |
60 |
60.9 |
61.8 |
62.7 |
63.6 |
64.6 |
|
|
2.5% Def |
50 |
50.7 |
51.5 |
52.2 |
53 |
53.8 |
|
|
2.0% Def |
40 |
40.6 |
41.2 |
41.8 |
42.4 |
43 |
|
|
GDP Growth at 1.0% |
£2,000bn |
2020 |
2040 |
2060 |
2081 |
2102 |
|
|
3.0% Def |
60 |
60.6 |
61.2 |
61.8 |
62.4 |
63 |
|
|
2.5% Def |
50 |
50.5 |
51 |
51.5 |
52 |
52.5 |
|
|
2.0% Def |
40 |
40.4 |
40.8 |
41.2 |
41.6 |
42 |
|
It can be seen from these tables that an additional 0.5% of GDP per annum spent on Defence would yield an extra £10 billion for the yearly defence budget. Given the difference between the overall defence budget reported to NATO and the actual Ministry of Defence budget, as referred to in paragraph 83 of this Report, it is reasonable to assume that about £8 billion per year would be added to the MoD for each 0.5% rise in GDP spent on defence. Out of this net figure of £8 billion, the MoD have to make provision for major existing shortfalls in its current budget, for example, the ‘black hole’ in the Equipment Plan, estimated to be be in the range of from £4.9 billion to £20.8 billion over the next 10 years.169
Note on Methodology
The choice of data. To create an independent calculation for illustrative purposes, World Bank and IMF figures have been used to establish a GDP cash baseline from which extrapolations can be drawn.
The figure for current UK defence spending. There are a number of different calculations of UK defence expenditure. Not all that is reported to NATO as part of the UK’s % of GDP spent on defence is contained in the MoD’s annual budget. Other items are included, and NATO’s official figure for UK defence expenditure is always higher. Private organisations such as the International Institute for Strategic Studies or the Stockholm International Peace Research Institute make their own calculations of national defence expenditures and offer different (though close) figures for the UK. For these reasons we have taken an independent calculation of the UK’s GDP and calculated the cash value of 2%, 2.5% and 3.0% of that.
The monetary value of UK GDP. The latest (May 2018) figure of the monetary value of total UK GDP is as calculated at the end of 2016 by the World Bank and stood at £1,963 billion ($2,650 billion).170 These calculations were made against prevailing $/£ exchange rates of May 2018. Allowing for an official UK GDP annual growth figure of 1.8% in 2017 and an estimated 1% anticipated for 2018 based on Q1 and Q2 results, a current, unofficial, estimate of the monetary value of UK GDP for 2018 stands at £2,018 billion. For the purposes of this illustrative calculation, the table rounds this figure down and assumes a starting figure of £2,000 billion.
The projection of GDP growth. All figures in this table have been rounded to the nearest decimal point. No estimate of a future price deflator (to allow for inflation) has been built into these figures. They are straight-line extrapolations from a 2018 baseline figure.
166 HM Treasury, Forecasts for the UK Economy: A Comparison of Independent Forecasts, No.370, March 2018, pp. 10, 12,14.
167 On this basis, our illustrative figure for UK defence expenditure at a flat 2% of GDP is £39.6bn. See note on methodology for further details.
168 Ibid.
169 National Audit Office, The Equipment Plan 2017–2027, HC 717, 30 January 2018, p. 4, reported an ‘affordability gap’ ranging from £4.9bn to £20.8bn over the coming decade, depending on assumptions about minimum to maximum risk factors and any MoD remedial measures.
170 Statistica https://www.statista.com/statistics/281744/gdp-of-the-united-kingdom-uk-since-2000/. The International Monetary Fund offers a figure of $2,627bn.
Published: 26 June 2018