Deterrence costs and we will all have to pay

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The UK government received an extraordinary tongue-lashing this week from the former Nato secretary-general Lord George Robertson. The author of Britain’s strategic defence review accused ministers of “corrosive complacency” for a nation already “under attack”. He hoped the UK defence investment plan would “survive [the] vandalism of the non-military experts in the Treasury”.

Robertson set out the defence establishment’s economic views in similarly stark language. “We cannot defend Britain with an ever-expanding welfare budget,” he said. His 2025 review went further, describing defence spending as an “engine for growth”, with spending that supports jobs and investment that “delivers both for the warfighter and for the economy”.

Insults, of course, are not a one-way street. This month has also seen the economic establishment hit out in rather more measured tones against many of the myths spread by military spending enthusiasts.

Raising defence spending tends to increase inflation, worsen public finances and countries should expect any rises in output to be “modest”, the IMF said in a chapter of its World Economic Outlook. Having created a large database of past defence spending booms, it found that countries tended to borrow to fund the spending and import military hardware, putting macroeconomic security at risk.

The difficult reality is that both sides are telling the truth. Security is undoubtedly the first duty of any government, but achieving that security comes at a cost to society.

The purpose of the vast majority of military spending should be deterrence. Ammunition works best if it is safely stored in a box and never used until it becomes obsolete. The best cyber defence is sufficiently secure that adversaries do not test it with expectation of success. Military personnel are trained to kill and are genuine heroes if they never have to put the training into practice.

When redundancy is the ambition, it is clear that military spending is an economic cost not a benefit. There are often positive spillovers from defence research and development or other spending to the wider economy, but they would have to be massive to make defence investment more growth-friendly than public investment with a material return, such as transport, energy and digital infrastructure, or government spending on health or education that heals people and increases knowledge.

Borrowing to fund a temporary rise in defence spending is justifiable if, as is the case for Germany, a country has strong public finances and a cyclically weak economy able to absorb additional demand without generating inflation. It also works for Poland, which has strong public finances and has spent most of its additional spending on imported equipment, which has helped its economy avoid overheating. But these considerations do not readily apply to the UK, France, Italy or most other European countries.

Robertson and the defence establishment are right, however, to highlight that the threat that the UK and other European countries face is amplified by the reality that their defence systems cannot be guaranteed to deter.

The one thing worse than spending money on a redundant military is fighting a war due to insufficient attention given to deterrence. As the IMF itself demonstrated, war generates the worst outcomes for economic performance and social security. In today’s world, with European nations threatened by Russia, China and, in the case of Denmark, by the US itself, that means they need to spend more on defence. The 1990s peace dividend was real and pleasant, but it has gone.

In addressing such serious issues, the economic and defence establishments should not be squabbling, but working together to find the best path forward and persuade the public of its merits.

That path is both well known and difficult. Greater defence spending is a necessity but its scale needs to be determined by a hard-headed cost-benefit analysis of what is needed to most efficiently secure deterrence. Arbitrary targets for the share of GDP that needs to be spent are unhelpful in this regard.

Apart from countries with strong public finances, the additional spending will need to be financed in short order by spending cuts in other budgets or tax increases. This is difficult for governments and having Robertson glibly suggest it can come out of welfare was very unhelpful. The key pressure on the welfare state comes from pensioners who object vociferously to any cuts in provision.

The brutal truth is that rising external threats have increased the costs of running an advanced economy. Deterrence is expensive. There is no free lunch. We will all have to pay.

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