We need better value-for-money in defence spending

Last week, Prime Minister Rishi Sunak committed to raising UK defence spending to 2.5% of GDP by 2030. The Prime Minister’s commitment grabbed the headlines, but it also raises serious problems. The headline defence spending figure cannot be the only focus of Britain’s defence policy. We also have to ask what the opportunity costs of this commitment are and how the money will be spent.

There are no free lunches, and higher UK defence spending means that something else has to be sacrificed: what goes to fund higher defence spending? The sacrifices include cuts in civil government spending and/or higher taxes and/or increased government borrowing.

Cuts in government spending might affect education, health, transport (e.g., roads, rail), sewage, and local government. As always, choices are difficult but cannot be avoided and will have electoral consequences.

But more importantly, there is no guarantee that this investment will live up to its promise. The decision to increase defence spending is only the start of some difficult choices for military planners. Increasing inputs does not always mean better outcomes.

New funds have to be allocated between equipment and personnel, between the army, navy and air force, and between nuclear and conventional forces. But there are further choices: between defence R&D and current spending (between old and new technology) and between reserve and regular forces. How confident are we that the extra funds will be spent efficiently?  The track record is not persuasive.

On equipment, the Ministry of Defence has a record of continuous cost overruns, delays in delivery and project failures reflected in costly cancellations.  Recent examples include cost overruns on Astute nuclear attack submarines, the continued failure of the Ajax armoured fighting vehicle and the cancellation of the Nimrod maritime patrol aircraft and its replacement by a US aircraft (Boeing Poseidon).

Personnel shortages remain, and the record on providing acceptable military housing is unsatisfactory to say the least.  The worry is that the increased defence spending will be wasted and lost in a series of ‘lazy’ choices based on incrementalism: lets buy a few more Typhoons, a few more warships and some more ammunition.

The Ministry of Defence has a ‘black hole’ which will readily absorb the increased budget with a philosophy of ‘spend it or lose it.’ The traditional solution to equipment spending has been ‘Buggins Turn’. This approach dictates that one year it is the Navy’s turn for a new frigate, next year the RAF can spend on its new fighter aircraft, the Tempest, and finally the Army can have its new tanks.

So how can the Ministry improve the efficiency of its decision-making? It can learn from the private sector where markets promote efficiency through competition and profit incentives. Outsourcing of defence contracts is a solution but the good incentives it could bring can be lost through ‘managed’ competition.

Attractive though competition might be, it takes time to implement. In the same way, converting increased defence spending into a greater output of defence equipment takes time for defence industries to respond. Increased defence output requires extra resources of capital and labour, none of which are available instantly and free. Defence industries are not like water taps which can be turned on and off instantly: the government should implement a consistent system of procurement competition to ensure a healthy supply of armaments. For example, competition can be extended by purchasing more defence equipment off-the-shelf from reliable overseas suppliers. This could increase capabilities at a lower cost than Britain trying to produce everything domestically.

One major problem remains. The government lacks any measure of the value of defence output such as sales, profits, and losses. Traditionally, defence output measurement, on the basis that inputs equal outputs, has been completely unsatisfactory and encouraged waste. In recent years, emphasis has been placed on capabilities such as the ability to fight a war in, say, Ukraine for up to one year or a similar deployment. This is the challenge for increased UK defence spending: how will it affect the UKs capability to fight wars overseas in an increasingly dangerous world?

 
Keith Hartley is Emeritus Professor at the University of York’s Economics Department and the author of a recent Institute of Economic Affairs paper, The Case For Markets in Defence: Driving efficiency and effectiveness in military spending.