If Rishi Sunak was hoping to set the British defence industry alight late last month when he announced a £75 billion boost in funding over the next six years then he will have been disappointed. There was a share price spike of three percentage points over a 24-hour period at BAE Systems and Rolls-Royce, the country’s largest defence contractors, but that soon subsided.
If you are looking for sustained appreciation in the market value of defence stocks, then there is nothing like actual war. Since Russia began its advance on Kharkiv a little over two years ago and Britain vowed to stand by Ukraine, shares in BAE, which produces munitions and builds fighter jets and warships, have soared by 125 per cent. Over the same period Rolls-Royce, the military engine maker, has risen 250 per cent and Babcock, which also builds warships, runs the Devonport naval dockyard in Plymouth and other military support services, is up 70 per cent. Shares in Qinetiq, the defence technology company, have risen 36 per cent.
What industry thinks
The prime minister’s statement that defence spending will be pegged to 2.5 per cent of GDP by 2030 was universally welcomed as a strong signal of intent. However, there are several “buts”, especially on where the spending will go.
British defence industry executives are notorious dissemblers when asked to publicly opine on the actions and manoeuvres of “the customer”, the government. One commented: “It is an acknowledgment that we are preparing to be on a war footing. But quantifying and translating it is more difficult. Trying to work out the specifics is a lot of guesswork.
“It is a lot more about the politics — the prime minister defending his position within his own party and in an election year putting the Labour Party on the spot. As for 2030? We’ll have had two general elections by then.”
Another said: “It is unclear on how it will work and indeed how much it actually is. There will be front-loaded spend for Ukraine but much of the rest of it could be at the back end. As for 2.5 per cent of GDP, it is worth remembering that it was at 4 per cent during the Cold War.”
Does it add up?
The true change in spending will be dependent on the impact of inflation and the level of economic growth.
Writing in The Times, Paul Johnson, director of the Institute for Fiscal Studies, described himself as “intensely irritated” at the prime minister’s presentation of the numbers: on one hand coming up with a big number that was “essentially meaningless”, and at the same time insisting that it will barely cost the taxpayer anything — when in fact there will need to be deep cuts elsewhere if the commitment is to be honoured. In short, Johnson argued, it is serious intent which needs a serious explanation.
• Paul Johnson: Empty defence spending promises are a shot in the dark
The industry and the budget
The defence industry employs nearly 150,000 people around the country, with 70 per cent of jobs outside London and the southeast. Annual turnover is reckoned to be more than £25 billion. Wages are 12 per cent above the national average.
Half the present defence budget goes on acquiring, sourcing and supporting military and other equipment. A little over a quarter goes on service and civilian personnel and the rest on sundry other commitments, the largest of which, at nearly 10 per cent, is infrastructure or maintaining the defence estate, including housing. Another 4.3 per cent goes on research and development, below the prime minister’s 5 per cent ambition.
Where will the money go?
There are already big programmes in train: the nuclear deterrent, the next generation Tempest fighter jets, and DragonFire laser beam weaponry in development.
Trevor Taylor, defence industries director at the Royal United Services Institute think tank, argues that such commitments could take up a lot of the extra spending, not least to make them affordable.
However, it is not that straightforward. “It is clear from Ukraine that deterrence must involve western forces that can conduct a sustained conventional war,” he said. “That has great implications for stock levels and industrial capacity. Then there is the big challenge of how established types of platforms and infrastructure can best be protected against novel systems including uncrewed air systems, cheap ballistic missiles and offensive cyber.”
Where should the money go?
The word from industry is this. The Ministry of Defence suffers from “eye of Mordor” syndrome, a Tolkien reference that the department can only focus on one thing at a time. The Royal Navy, for example, is being transformed by investment in aircraft carriers and the Astute and Dreadnought submarine programmes, and the nuclear deterrent.
Yet when the Russian invasion came along, Britain was flat-footed in its ability to ramp up munitions production. The Ukraine and Gaza conflicts have demonstrated the destruction wrought by off-the-shelf attack drones. Has the UK been concentrating enough on integrated air defence or the development of hypersonics?
The work of Russian and Chinese hackers has also exposed the UK’s cyber-defence capability. “Cyber-defence needs to be weaponised into the military domain, and urgently,” said one official.
There is also the need for investment in military personnel. A recent report from the House of Commons defence committee questioned whether the UK was “war ready” when the limited human resources of the armed forces are worn out by “sustained overtasking” at a time of dwindling recruitment. Skilled workers are leaving the forces. The shortfall has widened, the pressures have increased: the government, the committee concluded, “must break this vicious cycle” swiftly and with sustained effort.
Will it be spent wisely?
Defence companies have long complained of stop-start defence policies and a lack of the visibility that enables them to develop capabilities and manufacturing bases and invest in skills. The age-old questions remain: is the defence budget co-ordinated and aligned with industry capability, and is the existing money spent efficiently and wisely?
It’s a resounding “no” from Dame Meg Hillier, chairwoman of the Commons public accounts committee. “The Ministry of Defence’s lack of a credible plan to deliver fully funded military capability as desired by government leaves us in an alarming place,” she said after the publication of a recent report.
“This problem is not new. Year on year our committee has seen budget overruns and delays in defence procurement. A lack of discipline in the MoD’s budgeting and approach has led to an inconsistent plan that just isn’t a reliable overview of the equipment programme’s affordability.”
Is industry ready?
Kevin Craven, chief executive of ADS, the aerospace and defence trade body, has said that industry stands ready to deliver on the prime minister’s new commitment.
“As our world gets increasingly more dangerous, this unprecedented commitment to ensuring our collective security and the livelihoods of many throughout our country is necessary to our collective economic, social and national advantage,” he said. “We need to ensure that we are always in a fit and ready state to respond to the evolving threats that we face.”
Weapons of the future
Tempest An autonomous/remotely piloted fighter craft capable of flying at or near the speed of sound but invisible to the enemy, and running on green fuel, supported by a squadron of swarming unmanned attack drones — that is the task given to BAE Systems and Rolls-Royce to build a next-generation future combat air system to replace the Typhoon in the next decade. GKN and Qinetiq are also in the consortium as are, internationally, Italy and its contractor Leonardo, and Japan and Mitsubishi Electric. The budget over the next decade will run to tens of billions of pounds.
DragonFire Why would you shoot missiles at the enemy when you can eliminate them with laser beams? It is the latest MoD project borrowed from Star Wars or Star Trek to go into development, led by MBDA, the Anglo-European missile maker, and Qinetiq. “Laser-guided energy weapons” are coming sooner rather than later, with the MoD insisting that DragonFire could be deployed on armoured vehicles or warships as early as 2027 and, over time, on the Tempest fighter aircraft.
