Tag: Public Spending

Defence spending squeeze

If David Cameron does not want to be made a hypocrite for criticising those NATO countries spending less than 2% of GDP on defence, the Treasury must find more money for the MoD. He may lose the general election in May, of course, which might afford an excuse, but he will need to act if he wins.

Thanks to Malcolm Chalmers, RUSI Research Director, we have a little more data to be going on with. In his briefing paper, ‘Mind the Gap: The MoD’s Emerging Budgetary Challenge’, he projects, having studied the known spending plans of all three major political parties, that defence spending will fall to 1.85% of GDP in 2016/17, equating to £36 billion.

Notwithstanding any reservations we might have with arbitrary targets, this represents as clear an indication as we are likely to get that the Armed Forces are going to come under severe strain in the years ahead unless the government changes its priorities.

If we thought for a moment that the falling percentage might only be a consequence of increasing GDP – not of falling spending – we are mistaken. He predicts real-terms reductions of 10% over four years. This, he admits, is the pessimistic projection, but it is where we are heading if things don’t change.

Whatever your view on the importance of defence spending, this represents a real diminution in defence capability. And this at a time when the world looks as dangerous as ever. We do not need to list the threats: they are self-evident.

Part of the problem is a reluctance to add defence to the list of protected areas of government spending: International Development; Health; Schools, for example. It is a truism, but it is worth saying: the more we protect some areas of spending, the more we have to look at cuts in other areas.

The report says we must add something in the region of £5.9 billion to the defence budget if we are to maintain defence spending at 2% of GDP. It also says this is ‘not plausible’.

That seems like a generous word: ‘Plausible’. If it is taken to mean an increase in the budget is unlikely, an increase would indeed seem ‘not plausible’.

But if ‘plausible’ is used to mean what is reasonable, it is reasonable to expect the government to shift spending to defence from elsewhere. After all, the government already spends more than £700 billion a year. It’s always and everywhere a matter of priorities. If a government wants to find the money, it can: it’s simply a matter of not spending money on something else.

Politics may yet intervene. Pressure from the Commons, the Lords, the Defence Select Committee and, of course, the Opposition sniffing an opportunity, might force the government (of whatever colour) to find the money, even if, as the briefing paper suggests, it would have ‘to be found from increased taxation and/or borrowing’.

But perhaps the government has no intention of spending more on defence. There are, as the strategists give every impression of believing, no votes in defence. Though if the Conservative Party wants to retain its core vote, it might think twice about undermining yet another area of national life it’s core supporters think important. If the Conservative Party is not for strong defence, what is if for?

If the MoD is left with no option than to absorb real spending reductions, what are the options?

Personnel? Well, the personnel budget has already taken a hit. We know 20,000 soldiers are in the process of being cut, leaving the strength of the Regular Army at 82,000. The briefing paper goes further: we have reduced the numbers of service and civilian personnel by 17% and 28% respectively.

There are murmurings that the personnel budget will again be targeted, perhaps reducing the Regular Army by another 20,000. Perhaps this is little more than contingency planning, never to be implemented, but we cannot be sure. Politicians have a way of leaking stories to the media to see how they ‘play’ with the public. If the grumblings are manageable, then crack on—no votes in defence.

But it will be harder this time around to cut troop numbers further. You can squeeze only so much water from a sponge.

That leaves the equipment budget. Can savings be made here? Perhaps. The Defence Equipment Plan 2014 refers to a budget of £163 billion (for both procurement of new and maintenance of old) over the next ten years. While it might be difficult to make savings on some big-ticket items, not least a submarine replacement for Trident, there could be scope to cut in other areas.

Whatever happens, the MoD is in for a torrid time. It will either have to argue for more money, or it will have to find things to cut. Not an enviable task, even though there are no votes in defence.

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Still no votes in defence, supposedly

It is being reported in The Times and The Mail newspapers that a number of Tory MPs are not happy with the government’s stance on defence spending. About thirty of them, we are told, are preparing for some sort of Commons revolt next week when NATO spending is debated.

Their anger stems from the growing impression that the Tory hierarchy isn’t that bothered about defence. Defence of the realm is supposed to be a Conservative issue—the first responsibility of government—so you can see why some might be upset by these reports.

It seems increasingly likely that defence spending will fall below 2% of GDP, which is the amount all members of NATO are supposed to allocate to defence. This, of course, does not necessarily mean defence spending will fall in real terms, just that it will fall as a percentage of national wealth—provided the economy grows. Having spent so much time berating other members states, it seems a bit rich for us to fall below the level in the next year or two.

But there are also whispers that defence spending will fall in real terms, too. What they are talking about is a freeze, holding spending to about £36 billion for the next few years. When inflation is taken into account, this amounts to a real terms reduction in defence spending. This would have a real impact on our defence capabilities.

And on top of this, the dreaded phrase “There are no votes in defence” is raising its head again. Allegedly from Philip Hammond the Foreign Secretary no less. I have no idea whether he said this (his people say not), but if he did it would not have been a radical observation. Perhaps it’s because the benefits of defence spending are too intangible—much better to vote for benefits, subsidies and spending on things people will draw on every day, such as health or education.

It would also seem that these Tories have a right to be suspicious. The Coalition government has already slashed the size of the Army by 20,000 soldiers. This is 20% of total strength. By anyone’s measure, even when offset by the proposed uplift of 10,000 reserves (which is still a concept that needs to be proven), this is a significant reduction in our military strength.

Coming at a time when the threat from Russia to its neighbours, particularly the Ukraine and potentially the Baltic states, seems to be on the rise; and at a time when the threat from Islamism shows no sign of abating and every sign of increasing: it seems entirely logical that MPs with an interest in national defence should make their point.

It’s just that I’m sure the government would prefer them to make their point in private, and then shut up about it.

Not a Review of the Autumn Statement

Treasury statements, whether of the Budget or Autumn Statement variety, are so full of detail and minutiae and political misdirection that it’s difficult to make sense of them. And I don’t propose to start now.

But if one thing is clear, it’s that almost nothing upsets a politician more than low tax revenue. Apart from personal scandal, of course; although we seem to be free of that sort of thing, for now.

Low tax revenue means not enough money for politicians and their projects, and oh how they love their projects and schemes. Without them they feel uncomfortable and impotent, no matter how useful they are to the public that pays for them.

While there is something appealing in the concept of impotent politicians, it’s not in their nature to leave things alone. There’s always a problem, and it’s a problem, as luck would have it, for which they have the unique competence to solve. They didn’t go to all that effort to get elected in order to not do things in Westminster; and that includes many on the Right. They do, however, realise that tax revenue is dependent on economic activity; more activity means more things to tax. And, when we consider the extent of the deficit, we know we need more of it.

But how?

While a certain sort of grabbing politician sees an increase in tax as a moral good in its own right, they are obliquely aware that taxes can have a negative effect on demand. They ignore the problem, however, by exhuming John Maynard Keynes, the economist, and claiming that demand is best encouraged by governments spending stimulus-money. The circuitous nature of the argument is lost on them, but it is fortuitous that the moral imperative for governments to spend money legitimizes yet more taxation.

But there comes a time when people will not accept ever-increasing levels of taxation. When that happens, and when they realise that targeting the rich doesn’t raise the revenue they imagine, politicians fall on the second method of raising tax revenue: growth.

Growth is now the watchword because that is the second side of the spending-reduction coin. While deficits are reduced by converging the spending and revenue lines, the democratic system prefers, for obvious reasons, to increase spending even if revenues are concurrently decreasing. And in the face of sluggish tax receipts, growth is the most favoured way out of the predicament. Growth increases the size of the pie, and thus the size of each slice, which in this instance refers to the tax take; get growth, get more tax.

Yet none of this answers the question of how we get growth; where does it come from, and is there anything governments can do to encourage it? Again, this seems to depend on your political and economic perspective. On the one hand, there are those that see demand as the key to growth, arguing for government intervention to get money flowing and people spending. Yet on the other, there are those that see supply as the key to growth, who are less taken with monetary stimulus, preferring to concentrate on measures like deregulation and tax reduction.

This last measure, ironically, has a positive effect on demand as well as supply. While firms have more money to invest and reduce their costs, thus improving competitiveness, people also have more money to spend. Both demand and supply are helped. The stumbling block, however, is the short-term reduction in revenue and the worry that increased economic activity will not cover the new gap between spending and revenue caused by the new tax cuts.

But that is another issue. Politicians are now mostly arguing for growth, despite lingering calls for the rich to bear an even ‘fairer’ burden. Though it’s not clear that anyone has worked out when an acceptable level of fairness is reached. Politicians now seem to realise that the best way to raise tax revenue is to increase the size of the pie, which is good because tax increases are mostly counter-productive. No doubt this is why the Autumn Statement has just ruled out the so-called Mansion Tax.

It’s interesting, however, that Budgets and Autumn Statements no longer seem to be statements on budgets alone (if that was ever the case), but overarching statements on economic management. How easy would it be if the Treasury returned to simply raising the revenue it needed to meet government spending commitments, leaving the economy to manage itself through the invention and ingenuity of people and businesses? How easy indeed, but unlikely considering the never-ending supply of politicians with their little but expensive projects and their conviction that only through their endeavours can we be saved.

We need economic commentators who can see there might be more than one factor influencing performance.

A number of economic and political commentators speak and write great sense. This is reassuring for two reasons: a) Britain seems to be a country less and less willing to listen to arguments if they contradict certain orthodoxies and presumptions, and, b) We need people to keep the flame burning for reason and balance, especially in economic affairs.

While certain economic principles do not need debating, because the theory underpinning them is as agreed as 2+2=4, choosing overall economic policy is largely a matter of opinion. Economics is not a natural science, it is a social science, which means it is all but impossible to test theories in laboratory conditions; in short, and for example, we cannot isolate the effects of a tax increase on the overall economy because we cannot shut off all other factors that affect economic performance.

This is why it is fatuous to claim, beyond doubt, that so-called ‘austerity’ in the Eurozone is proven to be the wrong course of action because unemployment continues to rise, especially in those southern countries most adversely affected. It might be, but we cannot know beyond doubt. And it is noticeable that those speaking out against reductions in spending are those who tend to ignore the malign effects of the Eurozone.

But I mentioned other commentators, and it is one in particular I want to highlight who tends to speak more sense than most: Jeremy Warner. Below is just one extract I think makes it clear that questioning so-called ‘austerity’ is fine, but to ignore the elephant in the room of the Euro is just plain dangerous:

The UK also has still relatively low levels of unemployment and one of the best labour participation rates in the G7. We can all guess why the IMF has got itself into such a colossal muddle over the eurozone crisis. Europeans are still the dominant force within the fund.

Desperate for explanations, they’ve begun to wonder whether the fiscal medicine they’ve been applying is too harsh. Yet they still cannot bring themselves to admit the true explanation, the one that stares them in the face – it’s the euro, stupid.

Read the rest of his article here.

The TA is good, but there are serious risks to Army 2020

I’m a little late on this, but a letter from Maj Gen James Everard, Assistant Chief of the General Staff, that appeared in last Saturday’s Daily Telegraph has been nagging somewhat.

SIR – Con Coughlin (Comment, July 6) is inaccurate and patronising about the Army Reserve. He claims they do not show the same commitment or make the same sacrifice as their regular colleagues. Worse, he suggests that they join to “dress up” or “play at soldiers”.

The facts speak for themselves: since 2003 more than 28,000 Army reservists have deployed alongside their regular colleagues on operations. Some have been severely injured; 70 have received operational awards; and 26 have died. The day before the article was published, the latest reservist killed on operations, WO2 Thomas, was returned to Britain.

Those in the Reserve volunteer knowing they are making a major commitment; they often sacrifice time with families and career opportunities. Within weeks of deploying they are indistinguishable from their regular colleagues, and their contribution is far from “relatively modest”. They expect no special treatment and get none. Nothing could be further from the “all-expenses paid jolly” that Mr Coughlin alludes to. The Army relies on Reserve soldiers to serve in the front line today, and increasingly will in the future.

Now, I am almost completely in agreement with ACGS.  It is never easy to hear outsiders level criticism at the Armed Forces, whether regular or reserve; and when made in the characteristically blunt and uninhibited fashion of a Con Coughlin, it is enough to provoke a letter of rebuke to a newspaper.

But we should remember that we are all, in some way, partisan.  Having a go at your opponents is not just something for politicians and their media attendants.  And it is sometimes easier for military people to become indignant over criticism (Not that I’m saying ACGS is getting indignant here).  After all, what do civilians know?  They risk nothing yet are quite happy to criticise those that do, even reservists they suspect wear the uniform mostly to look good.

Yet, to be fair to Con Coughlin – if it is indeed right to be fair to any journalist – he does seem to base his claim/suggestion that reservists are mostly “playing at soldiers” and enjoying some sort of “glorified adventure holiday” on someone else’s words.

“I reckon that only one in 10 members of the TA are actually worth bothering with,” a senior officer in the regular Army told me recently. “The rest are just in it for a bit of fun at the weekend, and are horrified when you suggest you want them to go somewhere dangerous, like southern Afghanistan.”

This doesn’t sound like much of an endorsement, even if it’s the opinion of just one serving officer who might or might not have had a run in with the TA.  I am a little out of the loop to know how accurate this picture might be today, but I suspect whoever said this is not being entirely fair.

Yet the thing that nags me is not so much the less than fulsome comments, or indeed the degree of their truth, but the fact ACGS picked this matter to raise in a letter to the Daily Telegraph and not something of greater importance.

The reservists I’ve come across mostly give the impression of positive and extremely capable individuals – some of them more so than their regular counterparts, as the article admits.  However, they are reservists for a reason – they do not want to serve full time.  Therefore, while they may be good at soldiering, they have other priorities, namely their job.  And this, surely, is the main sticking point of the plan.  Army 2020 reduces the size of the Army, and reservists are expected to fill the shortfall.  Is this likely?  Is this even possible?

The government, as mentioned in the article, is taking an “enormous leap of faith.”  We are effectively saying that the British Army will only be able to deploy with support from the TA.  This seems to me – no offence – to be a retrograde step that undermines the whole rationale of a regular, professional army.  We moved away from citizen armies for a reason: they might be larger than their professional counterparts, but they are not as good.  They do not receive the same amount of training and they are not at the sole call of the government.  Professional soldiers are not committed to parallel careers.

The TA, as it stands, might not be perfect.  But it’s an excellent source of semi-trained and, above all, willing manpower that could be mobilised relatively quickly if the balloon really does go up.  And now we are changing all that, and adopting a new structure that, no matter what people say, is more about saving money that utilising the self-evident talents of reservists.

The risk is not just that the TA might not be able to increase its size in order to meet its target of 30,000 reservists.  The risk is also that serving members of the TA, and their employers, might take exception to the demands proposed.  Currently, reservists volunteer for deployment, but this new scheme would require mandatory mobilisation not least because it would make no sense to be in the TA and not deploy if that was the primary purpose of the force.

I know why ACGS would want to defend the TA, but we really do need to discuss the risks, not least because we are more likely to mitigate them if we understand them.  Why doesn’t he write a letter about this (perhaps he has and I’ve just missed it)?  The answer lies somewhere in the idea of constitutional propriety.  Soldiers do not meddle in politics and the decision to restructure the Armed Forces is primarily a political matter.  Therefore, he cannot be seen to question that decision, let alone oppose it.

I mentioned earlier that this characteristic of our Armed Forces is a double edged sword, and when you combine this sense of constitutional appropriateness with their can-do attitude, there is a danger that political decisions are not questioned as strongly as they might, or ought.

But that’s the way it is.  It’s happening, and we better hope that the plan to increase the TA and fundamentally change the nature of their service works.  Because the Regular Army is highly unlikely to delay its cuts, and if the TA cannot fulfil its part of the plan, then we will all be in serious trouble.  In fact, on second thoughts, we won’t be in trouble.  Soldiers will be, as they deploy to meet the next commitment with even less punch than they have now.

Squeezing defence carries little political risk

Defence restructuring (otherwise known as defence cutting) is one of the more pain-free political activities out there today.  Service personnel are generally a well disciplined lot, and when asked or told to do something they do it.  After all, when compared with their willingness to risk their lives, risking a mere job doesn’t seem so important.

This can-do, will-do attitude is something of a double edged sword.  On the one hand it is an essential characteristic of a professional, capable, democratically accountable force, but on the other it can lead them into doing things they might not agree with.  Sometimes I wonder if both they and the country might not be better served by defying politicians a little more – or at least questioning their decisions more robustly.

General Sir Richard Dannatt tried this when Chief of the General Staff in 2006.  He commented, in less than wholehearted fashion, on our continuing involvement in Iraq, the military covenant and the moral and spiritual vacuum opening up in Britain.  But he did so with great delicacy.  No bullishness, no populism, just points made with consideration and subtlety.

Yet even this restrained engagement induced criticism from those who seemed to think a service chief had no right to comment on things that were in fact very much his business.  Some of this disapproval certainly came from within the military (though much exaggerated by commentators), but most came from outside.  They were quick to cry terror at the impending military coup, revealing only their suppressed suspicion of the military class or their misunderstanding of the true restraint shown by military personnel.  I may have exaggerated that last point, but Dannatt really was shocked by the uproarious response from some quarters.

To be fair, the government has an unenviable task.  The budget is in a right mess.  The first problem is the immense pressure to reduce spending across the board (except those preserved areas of health and international development), and the second is the existing deficit in the defence budget.  The Economist speaks of a £38 billion hole that needs to be filled.  It seems that financial commitments have been made without knowing where the money is going to come from.

There are, of course, arguments for delaying fiscal consolidation until the economy is growing strongly again.  Punk- or selective-Keynesians argue that any squeeze on public spending at a time of recession is self-defeating, and in normal circumstances they might have a bit of a point.  But these are not normal circumstances and they ignore two crucial points: an increase in the demand for borrowing puts upwards pressure on the cost of borrowing, and, considering our debts, we should probably keep an eye on that; and the Keynesian approach requires budget surpluses to be run on the up-side.  I do not think Keynes ever planned for governments to run permanent deficits.  And the government is therefore caught between the rock and hard place of keeping the markets happy and not throttling the economy into permanent recession.

The old orthodoxy of balancing budgets has been much criticised since the 1940s, and still is today, but growth induced by government spending (if real growth is ever induced by this alone) is not going to generate the revenues to eliminate the budget deficit.  Sometimes a hit just has to be taken.

But the point stands.  There is far less political risk in squeezing defence than almost any other area of public spending.  And before long we will be back discussing the NHS, education, welfare and Lords reform apparently, and servicemen and women will go back to serving the national interest in their own selfless, unassuming way.