Why Britain gets defence wrong

Stop fixating on numbers and start focusing on capabilities

Today on Arguably, economist Jeegar Kakkad explains why the UK government is having the wrong argument over defence spending.

(Andrew Harker/Shutterstock)

Britain has spent the past year arguing about defence spending: 2.5 per cent of GDP, then 3 per cent in the next parliament, then 3.5 per cent by 2035. Almost every fight has been about the price. Almost none have been about the policy: what are we insuring against, what loss are we trying to prevent, and how will we know the cover is adequate?

At the top level, the government’s diagnosis on defence is right. The US now expects Europe to bear a greater burden. The threat from Russia and the pace of technological change demand investment now rather than in future decades. And a middle power such as the UK has to work closely with allies instead of pretending it can do everything alone. The 2025 Strategic Defence Review said all of this.

The problem was delivery. Defence policy was pulled in three directions: the security imperative to invest now; the political imperative to deliver jobs and industrial capability at home; and the Treasury’s fiscal imperative to constrain spending. The government had to pick one and organise the other two around it. It never did. John Healey’s resignation letter was the cost of that indecision.

Our allies have acted while Britain has pondered. Germany rewrote its fiscal rules to fund defence, Poland is spending at generational levels (4.8 per cent of GDP), and Canada is building the Defence, Security and Resilience Bank, designed by former British Army officer Robert Murray. Meanwhile, the Defence Investment Plan has remained unfunded as cabinet ministers have argued about affordability. Every delay tells industry that British demand is unreliable, with capital, factories and talent moving to where the orders are flowing.

That’s because defence spending is not a normal departmental budget, or an industrial programme with a flag on it. It is insurance against catastrophe and the policy pays out in deterrence – the aim of spending now is to prevent threats in advance. Ukraine demonstrates the scale of uninsured loss: cumulative losses of roughly 193 per cent of pre-war GDP, estimated reconstruction costs of $588bn, and the loss of 20 per cent of its territory. The real question isn’t 3 per cent versus 3.5 per cent. It’s whether the money buys the protection the threat demands.

Finland suggests it doesn’t. The Finns spend about the same share of GDP on defence as the UK and are far better prepared: a wartime army of 280,000, hardened infrastructure, a drilled population. The usual response is that Finland isn’t a helpful comparison because it has an existential threat on its border. So does the UK, but we just haven’t admitted it as a nation. The lesson is that preparedness is a system, not a percentage.

Russia has spent years mapping the undersea gas pipelines and data cables this country runs on, and dragging anchors across the Baltic seabed to warn us of the destruction and disruption it can unleash. We are an island, so sever enough seabed infrastructure and the result is not a technical fault but an economic and national security crisis. Never mind ministers, that should keep the public awake at night.

Pricing protection against such threats is hard for three reasons. First, defence objectives overlap: the same capabilities that can protect against Russia in the North Atlantic and High North can be deployed to protect trade routes in the Middle East. Second, operational context drives cost: deploying 7,500 peacekeepers in Ukraine costs one amount under a US or NATO umbrella and far more as a purely European operation. And third, the threat is constantly changing: as the enemy’s tactics and technology evolve, so must the protection.

And because pricing is hard, governments retreat to what is easy: arguing about the total rather than thinking strategically about capability. That is the trap waiting for Dan Jarvis, the new Defence Secretary. He inherits the same pressure to prioritise between national security, domestic politics and fiscal constraints. The job is impossible until the government decides which comes first. The honest answer is security, and making that choice stick means three changes.

First, rewire how the government thinks about defence: not as a jobs programme or a flag-waving exercise, but as insurance against a rising and evolving threat. That demands new metrics for deterrence, new operating concepts, and constant experimentation to ensure deterrence matches the threat A defence budget built around the threat still creates high-quality jobs in advanced manufacturing and cyber because deterrence is what sustains demand. It also recasts the seemingly arbitrary GDP target as what it really is: a signal to our enemies and a back-stop against short-termist politicians or a recalcitrant Treasury trading off defence spending against other domestic priorities.

Second, revive the Blair-era mantra of no investment without reform. Reforming the Ministry of Defence’s existing systems is probably impossible, so No 10, the Treasury and the MoD should build new ones capable of moving at the speed of the threat. Start with autonomous and attritable systems, such as low-cost drones, above all in the maritime environment where Russia is already active. Ukraine and the US show the way: marketplaces, flexible procurement, and fast, iterative buying cycles built for learning and experimentation, not stockpiling.

Third, rethink how defence is financed. This is no time for peacetime squabbles over fiscal headroom. If the City is comfortable with government-issued, inheritance tax-exempt war bonds, then the Treasury should explain why it is not. Cheaper capital for defence firms belongs in the same conversation, as does copying Germany’s use of the state’s balance sheet to crowd in private capital. Defence cannot move at the speed of the threat if our industrial base is financed at the speed of peacetime procurement.

The defence rows of the past year all assumed the hard question was how much to spend by when. It never was. The hard questions are those anyone buying insurance would ask: what are we protecting, what is the threat, and how do we know it’s working? Until the government starts there, 3.5 per cent is not a strategy. It is a premium paid on a policy Britain has not read.