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Microchips, GPS satellites and the EpiPen are just some of the innovations that started life as US military projects and have since become ubiquitous — helping America extend its economic lead over the rest of the world.
Sir Keir Starmer wants to emulate the US example, promising voters this week that boosting UK spending on the military to 2.5 per cent of GDP by 2027 and to 3 per cent in future years would yield a “defence dividend”, in the form of jobs, exports and lasting productivity gains.
“Defence is now central to both our national security and our economic growth,” the government said as its unveiled plans to build new missiles and submarines on home soil.
But economists say the short-run boost to the economy will be limited — especially if the expansion of the UK defence industry crowds out other activity, if some of the money is spent on imported kit, or if the government pays for it by raising taxes and cutting investment elsewhere.
Starmer has raided the international aid budget to bring defence spending to 2.5 per cent of GDP by 2027. He has not set a date to hit the 3 per cent target — or said where this extra £17bn a year would be found.
The consultancy Capital Economics estimated that if new defence spending was funded by government borrowing, each pound, euro or dollar spent would typically boost economic output by around half that amount.
But Paul Dales, chief UK economist at Capital, said the UK would “probably receive a smaller boost” than countries such as Germany, given a lack of spare capacity in the economy, and tight fiscal constraints that would make it hard to fund the increase by borrowing more.
“There are obviously potential opportunities, particularly for exports,” said Ben Zaranko, associate director at the Institute for Fiscal Studies. “But if these things were sure-fire ways to get growth, why weren’t we doing them three or four years ago?”
The government hopes, however, that longer-term gains will flow if public investment in innovation pulls in private capital and spurs the development of “dual use” technologies with wider civilian applications.
Paolo Surico, a professor at the London Business School, has briefed officials at the Treasury and Ministry of Defence on research he conducted suggesting that extra defence spending worth 1 per cent of GDP could raise GDP by up to 2 per cent in the long term and boost the UK’s poor productivity by 0.3 per cent over 15 years — provided the money is concentrated on research and development.
“US defence spending has been critical to an innovation ecosystem that has made them head the innovation race for the last 50 years. This is a productivity opportunity . . . Public R&D is the strongest and quickest way to push productivity,” he said.
Another influential voice in the Treasury is John Van Reenen, a professor at the London School of Economics and adviser to the chancellor, whose research suggests that government-funded R&D, especially in defence, does “crowd in” private R&D and result in higher total spending on innovation, with a positive effect on productivity.
Surico points to the 1960s space race, Ukrainian ingenuity in engineering drones since the invasion by Russia and the rush to develop vaccines during the pandemic as instances where a public emergency has led to big technological breakthroughs.
“What really makes government spending special is when . . . there is a sense of urgency, and a promise to the private sector that if you solve my problem, I am going to buy a lot of this,” he said.
UK ministers have made it clear they aspire to this, promising to harness “innovation and industrial power” to make defence “a new engine for growth . . . measuring success in the number and scale of defence and dual-use technology companies in the UK”.
Less clear, though, is whether the money flowing into research and development will be enough to make a significant difference. The new defence strategy promises radical changes to unwieldy procurement processes and funding models to pull in venture capital.
While £15bn is earmarked for new nuclear warheads, £6bn for munitions and £7bn to upgrade mouldering military housing, the only specific mention of new funding for R&D is an annual £400mn budget for a newly established UK Defence Innovation body.
“If you tilt [extra spending] with a large R&D component, you get a significant productivity effect for a long period . . . If you use it mostly to buy equipment and get more soldiers, then you get a very small economic effect and no effect whatsoever in the long run,” said Surico.
Claudia Steinwender, a professor at Ludwig Maximilian University of Munich and co-author with Van Reenen, said their research showed that productivity gains from defence spending were modest, even after big increases as seen in the US after 9/11.
Spending the same money in other areas might boost growth more, she said, but given the geopolitical imperative to spend more on defence now, “if it’s spent on R&D, at least there is potential for positive effects”.
She added: “Given that you have to spend . . . you should do it in a smart way.”
