2.5% Too Little and 2.5% Too Late

Rishi Sunak has pledge to hike defence spending to 2.5% of GDP by 2030, raising the MOD’s budget to £87bn over the next six years. The move came on a trip to Poland, and was announced via a press release from the Prime Minister’s office – not the Treasury or the MOD.

Keir Starmer last week pledged that Labour would hit the 2.5% target provided it can be done within Labour’s fiscal rules. So Sunak’s move has to be seen as a reaction both to pressure from Labour, and from his own Cabinet colleagues who have been openly calling for a rise to 2.5% and beyond.

And it is fairly blatantly an electoral, rather than a fiscal, event. It comes with no explanation of where the money will come from: there is not even an official prediction from the OBR as to what GDP will be in 2029-30. So how should Labour respond?

First, we should recognise that Sunak is moving into election mode, signalling security and defence as a major theme. Defence spending will rightly be an issue in the coming election, because the threats to the UK are rising and there is a £17bn black hole in the MOD’s Ten Year Equipment Plan.

Keir Starmer’s commitment to 2.5% came with no timescale, but there is a strong case for Labour to quantify the pledge in its manifesto – which would not just match the Tory move but significantly improve on it.

Using the OBR’s own fiscal multiplier model, I calculate that, if Labour comes to power this summer, and does an in-year hike of Defence to 2.5%, debt would peak at 99.6% of GDP in 2025-6 and be falling to 96.6% in 2028-9. In the same year the deficit would be falling to 1.5% of GDP, matching both the Government’s and Labour’s fiscal rules.

In short, 2.5% is highly affordable – if done through borrowing – and at the same time unlikely to match what is needed.

Labour’s John Healey has pledged to conduct a Strategic Defence and Security Review in 2025, in order to determine the threats, the state of the armed forces and the resources required. This is the right response: we are stuck in a debate about percentages when we should be having a debate about the scale of the threat, the billions of pounds needed to match it, and how to finance that.

That’s what they did in the 1930s: even under austerity the Baldwin government found the courage to make a massive hike in defence spending, because they began from geopolitics.

As for the rest of Sunak’s announcement, much of it is borrowed from Labour. In March, Healey announced Labour would turn the MOD into a Military Strategic HQ – bringing its currently peripheral military command structures to the centre of the operation. Today Sunak accepted that.

Sunak also pledged to centralise innovation within the MOD – because it is currently scattered across numerous “enabling agencies” and not clearly guided by the needs to mobilise R&D to meet the threat from China and Russia. Again, Healey was ahead: last month Labour pledged to centralise both procurement and R&D under the watch of a National Armaments Director with cross-service powers.

It’s good that Sunak’s government has adopted key aspects of Labour’s plans for defence. It will be even better once they move out of the way so we can enact them. Russia has hiked its defence spending to 6% of GDP this year, and is spending 40% of its state budget on war. 

To promise, without any official fiscal documents, a rise to 2.5% in six years time is not leadership – it’s followership. Calling on Labour to “match” a press release might sound good for a 12-hour news cycle, but it is not serious politics. Serious politics would be coming to Parliament with a spending pledge and the means to pay for it.

For more on Labour’s defence policy, see Labour’s place in a more threatening world: Three takeaways from John Healey’s Policy Exchange speech.

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