Standard Life Investments

Weekly Economic Briefing

UK

On target but under pressure

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The rising tension between the West and Russia is acute in the UK. The recent poisoning of an ex-Russian spy on British soil caused a breakdown in diplomacy, as the UK expelled 23 Russian diplomats. This was supported by its allies, who followed suit, expelling more than 100 diplomats in total. In light of this, assessing the defensive capabilities of the UK and the strategy for defence going forward is timely. The share of UK spending on defence has been steadily declining, with spending on other key policy areas like healthcare and social security now overshadowing this (see Chart 4). Despite this, the UK narrowly meets the NATO target of 2%, with defence spending at 1.9% of GDP. Generally, public opinion as measured by the British Attitudes Survey points to a far greater desire for increased spending on policy areas such as healthcare and education than on defence matters.

Bottom of the pecking order Skills gaps emerging

The government recently published an update to its national security capability review, with six key challenges for future national security considered. These ranged from the threat of terrorism, extremism and instability, to the impact of technology and cyber threats. The emergence of non-conventional forms of warfare such as cyber-attacks adds to the need for ever more sophisticated intelligence and surveillance methods. This was particularly clear with the unprecedented joint security announcement last week between the US and UK intelligence services warning of Russian cyber threats, with an extensive document advising businesses and households on how to best protect themselves from such attacks. There is a growing need for coordination between intergovernmental departments, with the need for information sharing between military, security services and intelligence agencies increasingly apparent. The proposal of combining national security responsibilities into one budget could be one way to facilitate this, with aspects of Home Office security, intelligence gathering, and the military combining into one budget. However, this risks causing controversy as it could be seen as a way of manipulating the data to continue to meet the NATO target (estimates put the combined budget at around 2.7% of GDP).

In its current state, the UK’s defence department faces issues around funding sustainability and the recruitment and retention of personnel. Although the UK still meets the 20% equipment spending target of NATO, a recent inquiry into the Ministry of Defence’s 10-year equipment plan highlighted major flaws, with the affordability gap of planned spending ranging from £4.9-£20.8 billion over the 10-year period. There are also growing concerns over the recruitment and retention of skilled personnel, as the number of full-time military personnel is currently 5.7% below existing staffing requirements. The National Audit Office has identified 102 key ‘pinch-points’ with engineering, intelligence and logistics being particularly stretched (see Chart 5). A ‘pinch-point’ is defined as an area where there is not enough trained regulars to perform operational tasks without taking action to mitigate the shortfalls. The areas in which these skills shortages are concentrated are likely to be those where the future demands on the national security are borne. To meet its broader national security agenda, the UK will need consistency in funding for defence and to close the skills gaps that are crucial for the functioning of the UK’s defensive efforts.

Abigail Watt, Senior Analyst