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The Gathering Economic Storm and its Impact on UK Defence

Commentary, 14 October 2008
Defence Management
Depending on the severity of the global economic consequences of the current financial crisis, Britain's Ministry of Defence may have fewer resources to face more dangers in a radically-changed geopolitical environment.

Depending on the severity of the global economic consequences of the current financial crisis, Britain's Ministry of Defence may have fewer resources to face more dangers in a radically-changed geopolitical environment.

By David Kirkpatrick, Associate Fellow, RUSI

Only a few weeks ago, the UK Chancellor of the Exchequer was widely derided for describing the current financial crisis which is now affecting the economies of the UK and other developed nations as the most serious for half a century. Today it is accepted that he was correct, and that the global economy is now entering uncharted waters where conventional economic dogma is an unreliable guide to policy. It remains to be seen whether the collective wisdom of national governments and of their central bankers can resolve the current financial crisis and limit the economic damage to a short and shallow recession, or whether the economic downturn will match or even exceed in severity the depression which followed the Wall Street crash of 1929. The UK’s defence sector will inevitably be affected by the current financial crisis and the imminent economic storm, depending on its eventual severity.

Budget management

One inevitable consequence of the financial crisis is that the UK’s rate of economic growth over the next few years will be below its natural level, and, indeed may become negative. It follows that the level of unemployment will rise, depending on the extent and duration of the economic downturn and on how flexibly the various sectors of the UK economy can respond to their new environment. In these circumstances the government’s revenues will fall and its non-discretionary expenditure on social benefits will rise, reducing the funds available for defence, the 2012 Olympics and other areas of public expenditure. Any reduction in the defence budget below planned levels would place the MoD in a particularly difficult position; its future budget is notoriously under strain because of its chronic over-optimism on project costs, and part of its planned expenditure is committed to long-term contracts which are governed by private finance initiatives (PFI) or by international agreements. Its scope for budgetary saving is thus limited and the effects are likely to be painful, just as a family with relatively large mortgage and hire-purchase debts will suffer more in an economic downturn than another which has fewer debts or even has some savings to help it to ride out the economic storm.

Even if the UK government could sustain its planned defence budget, the MoD is likely to be overstretched by accelerated deliveries. In normal times the MoD’s suppliers tend to give priority to their commercial and defence export customers, where profits are not limited by the MoD’s formula, and consequently their deliveries to the MoD are often delayed. In a future global recession, a dearth of commercial business and defence export orders will mean that suppliers will deliver goods and services to MoD on schedule, or with less delay than expected, and will demand payment earlier than MoD had planned. This acceleration of payments due will place an extra strain on the MoD’s budget.

Personnel management

Thus the MoD’s budget management will become more difficult, but conversely its personnel management will become easier. As the UK goes into recession, or even into a depression, there will be less demand for labour in other sectors of the economy. The armed forces will then find it easier to meet their targets for recruitment and retention of personnel, particularly those with skills in information technology who are needed to implement network-enabled military capabilities.

Return to the status quo?

If the developed nations suffer no worse than a short and shallow recession and if, consequently, the less-developed economies in Asia and Latin America (where financial markets have remained subject to greater government control) manage to escape virtually unscathed, the world can return within a few years to business as usual, at least until the icecaps melt later in the twenty-first century. The UK’s armed forces could then continue in their present roles, maintaining both the military capabilities needed for high-intensity operations as part of the NATO alliance and those needed for lower-intensity operations to suppress terrorism and to uphold international security.

Or change to a more-dangerous world?

However, if the developed nations prove powerless to check their economies from plunging into deep and prolonged depressions (characterised by collapsing stock markets, mass unemployment, bankruptcies, trade wars and other features of the 1930s), the geopolitical environment could change dramatically under pressure from the politics of panic. In that case all of the nations of the world would be affected, especially those over-reliant on a single activity such as financial services or oil extraction, and they might succumb to extremist politics (emanating from fascism, communism or theocracy) in trying to retain some shreds of their former prosperity. Some nations could fragment as deprivation sharpens traditional regional antagonisms, and alliances could come under centrifugal strain. In this less-cooperative world, the MoD would have to revise its Defence Industrial Strategy to retain sovereign control over the supply of a wider range of defence systems and subsystems, and to sustain the technological expertise and intellectual property rights now held in many small UK defence contractors. In a more-turbulent world, more nations might resort to violence to achieve their objectives, and there could be many more demands for action by UK armed forces to counter aggression, promote stability and aid refugees. But to play an effective role with depleted resources in that dangerous world, the UK’s armed forces would have to be directed with great discrimination and efficiency, distinguishing clearly between those operations which are essential to national security, welfare and other projects which would contribute only to national vanity.

Within the UK itself, it is uncertain how the population might react to a deep and prolonged economic depression and to the loss of many of its accustomed amenities. The unifying forces in society – respect for the Monarchy and the Church and an accepted code of ethical behaviour – are probably weaker than they were a few decades ago when Mrs Thatcher claimed that ‘there is no such thing as society, only people and their families’. Whether or not British society is now ‘broken’, it might crumble under the stress of unexpected deprivation, and a prudent government would control the retail prices of essentials, such as food and energy, to keep them affordable. It has been observed that guillemot colonies have responded to collapsing fish stocks in the North Sea by (uncharacteristically) murdering their neighbours’ chicks. Outbreaks of such selfish or dysfunctional behaviour in any or all social groupings in the UK would make it difficult for a future government to collect taxes, uphold the rule of law and maintain essential services. Even in extremis, however, I suggest that the UK government would be very reluctant to use its armed forces in military operations to support the civil power, and thereby invite comparisons with the Protectorate and Peterloo, though the government would be glad to use the forces’ organisation and discipline to sustain essential services to a fractious population. If so, it is unnecessary even now for the armed forces to consider how they should be organised and equipped if they were likely to be deployed for active operations in any particular part of Britain where the government’s authority had been challenged.

History has not ended

A dozen years ago it was proclaimed that the democratic-capitalist model had triumphed so completely over other ideologies that its triumph represented ‘the end of history’. While this model retains considerable strength and resilience, the global community’s faith in the ultimate beneficence of market forces has been weakened in recent years when the greedy and dishonourable flourished in ostentatious opulence, and has been severely shaken by the ongoing carnage on the world’s stock exchanges. It is evident that history has not ended and that the armed forces of the UK will continue to ‘live in interesting times’.

The views expressed above are the author's own, and do not necessarily reflect those of RUSI.

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Author

David Kirkpatrick
Senior Associate Fellow

Professor David Kirkpatrick is a Senior Associate Fellow at RUSI. He trained as an aeronautical engineer and later as an economist.

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