U.K. Spending Review Indicates Shrinking Real-Term Defense Investment

British Finance Minister Rishi Sunak unveiled the Conservative government’s Autumn Budget and Spending Review 2021 (SR21) on October 27. The latest U.K. Spending Review sets departmental budgets out to fiscal year 2024-2025.

Sifting through the number tables included in the 200-page PDF, one element jumps out to defense observers: in future planning years stretching out to 2025, the U.K. defense budget will grow by only 1.5 percent nominally.

But more eye-catching is that the document indicates shrinking investment in defense in real terms (by -0.4 percent). This is made all the more interesting in that the “Executive Summary” subheading on page 5 of the document includes a statement that every department’s overall spending will experience a real-term increase under SR21.

Obviously, this is misleading per the review’s own spending tables laid out toward the end of the document.

Contrary to the executive summary, the defense spending portfolio estimates for the upcoming years might be seen as a form of “savings,” enabling government investment to be shifted elsewhere (to the National Health Service, Justice, or Foreign & Commonwealth Office?).

The idea of future defense investment levels failing to outpace the assumed rate of inflation is contrary to the Conservative manifesto Prime Minister Boris Johnson’s party issued prior to the snap election held on December 12, 2019.

That manifesto pledges to “continue to exceed the NATO target of spending 2 per cent of GDP on defence and increase the budget by at least 0.5 per cent above inflation every year of the new Parliament” on page 55 of the 64-page document under the subheading “Putting Our National Security First.”

Political pledges are made to be broken and – even under the best of intentions – are prone to falling victim to constantly changing realities, such as fiscal pressures brought on by the COVID-19 pandemic.

However, it was only 11 months ago that Prime Minister Johnson promised an increase of over GBP24 billion ($33 billion) in additional funding across four years – in other words, not exactly a statement made pre- or post-pandemic.

Instead, with inflation continuing to rise (CPI forecast to reach 4 percent in 2022 and remain above 2.5 percent in 2023) and the economy expected to slow starting in 2023, hard realities are beginning to sink in.

To soften the apparent blow to defense, spending towards capital budgets (namely equipment procurement) is set to receive a nominal increase of 6.8 percent over the next three years, with this portion of the larger defense budget also growing by 1.8 percent in real terms. This will allow for continued investment in some major military equipment programs – ongoing and future – outlined in the latest U.K. defense review document unveiled back in March.

Yet the larger reality is that defense will take a bite in terms of growth-over-inflation in the coming years.

Then again, the “hit” will prove far softer than the 7.5 percent consolidated spending cut to defense undertaken from 2010-2011 through 2014-2015, soon after the economic fallout from the global financial crisis. And thanks to annual increases, plus extraordinary funding, the defense topline figure for 2021 represents a 20 percent hike from the baseline defense budget total for 2018.

All in all, it could be worse at a time when the government confronts higher inflation and mounting deficit and debt pressures as a result of pandemic-related economic and family support measures.

About Daniel Darling

Dan Darling is a senior analyst covering both the Europe and Asia-Pacific regions for Forecast International's International Military Markets group.

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