The Defence Pound in National and Local Prosperity

Recent Conservative governments were increasingly concerned with recognising that defence spending should contribute to UK prosperity. The Labour government, elected in July 2024, has firmly underlined this stance. In its consultation paper on national industrial strategy, the defence sector is identified as a key sector for growth.
In government policy, private sector defence spending aims to further multiple goals. Spending is traditionally associated with enabling UK forces to deter and frustrate aggressive adversaries, but even this is not a simple matter when a sustained conventional conflict occurs. Today, the risks of relying on foreign suppliers appear to be higher than a decade ago. Further, the outputs of the defence industry become a foreign policy tool when they are provided to others, such as Ukraine.

These considerations make the defence industry a cornerstone in generating UK security. But defence-focused installations, including military bases, do also provide employment and local spending for businesses and, formally since 2015, the Ministry of Defence (MoD) has been charged with using funds to support greater national prosperity. Thus, although defence spending serves multiple purposes, government policy does not precisely direct how different ends are to be weighted.

As Philip Dunne, a former procurement minister, found when he prepared his report on the value of the defence industry to the UK economy, there is an information problem due to the multiple sectors that are involved with defence: the MoD buys everything from office furniture to combat aircraft. This paper points to findings about which there can be considerable confidence while also noting where more research is needed.
Although the defence industry appears as a small element in the overall UK economy, it looms much larger once the most prosperous areas of the UK (London and the southeast) are removed from the picture. As the UK defence industry is predominantly located outside London, the importance of good salaries, a skilled workforce and above average productivity is enhanced when prosperity is the focus.

Although defence is making increasing use of electronics and software, major weapons and platforms must be engineered and physically manufactured. Consequently, many defence industrial sites are located in areas that were part of the Industrial Revolution. Shipbuilding and its support are concentrated in historical coastal sites in Scotland and the southwest. Submarine building has become the maritime focus at Barrow-in-Furness in the northwest since the early 20th century. And as UK coastal areas are poorer than the overall UK average region, these defence sites play a significant role in sustaining economic stability in those areas.

Aircraft became a national endeavour during the First and Second World Wars but their construction and design have since become concentrated around Blackburn and Preston in the northwest, although their engines and other subsystems are made elsewhere.

While basic economic principles assert that the labour and capital resources of failing businesses will normally be taken over by others with better prospects, UK and wider international experience is that areas dominated by long-standing industries such as textiles, coal, steel, pottery and mechanical engineering take much longer to recover when such industries fail.

Much of the defence industry in the UK should be recognised as a protection against impoverishment. There is wide recognition of the long-term social deprivation of a town where the workforce has been run down – for example, the shipyard’s workforce on the Trident programme in Barrow-in-Furness.

Defence businesses in the UK also positively contribute to the development of the national economy. With a longer-term prospect of orders, defence businesses train apprentices and graduates, some of whom become available to the commercial economy. They push forward areas of technology, including digital engineering, which is starting to dominate most manufacturing sectors. Firms in defence supply chains must use MoD standards for the protection of their IT systems, which promotes cybersecurity both nationally and in firms that work on both military and commercial contracts. This includes large firms such as Leonardo, Rolls Royce and Airbus, as well as thousands of smaller firms. Additionally, the limited exposure of defence to commercial economic cycles supports both those firms and wider resilience when the wider economy is suffering.

The UK government has committed to factoring in the prosperity-generating aspect of defence to its defence equipment decisions. This can play a key role where economic infrastructure is otherwise degraded. However, the lack of concrete methods to measure prosperity-related impact often leaves this factor undervalued when deciding between international and domestic bids. This paper addresses this gap by offering a more nuanced perspective.