COUNTRY SURVEY XXI: THE UNITED KINGDOM

Abstract

The UK defence economy has some distinctive features. Its Armed Forces have a worldwide capability reflected in modern air, land and sea forces with an expeditionary role. Its world role is further reflected in a nuclear capability and a high technology defence industrial base, substantial defence R&D with the UK as a major arms exporter. This survey focuses on the period 1970 to 2008. It explains the military‐industrial complex and estimates a demand for military expenditure function. There follows an analysis of procurement and defence industrial policy. Future policy issues are outlined, namely, the costs of the UK’s world role and its relations with European defence policy. It is concluded that the UK faces some difficult defence choices.

Keywords:

• UK defence economy
• Resource accounting
• Demand for military expenditure
• Costs of conflict
• Personnel
• Outsourcing
• Equipment
• Defence output
• Procurement policy
• UK defence industrial base
• Defence exports
• Future problems and prospects

JEL Classifications:

• H56
• C32

ACKNOWLEDGEMENTS

Thanks are due to Neil Davies, Chief Economic Adviser, MoD, Andrew Middleton, QinetiQ and to the referees who commented on the paper. Responsibility remains with the authors.

Notes

¹ Within these capabilities, it was estimated that to sustain an Army unit overseas for a prolonged period required four times the numbers to allow for rotation, training, preparation and harmony constraints.

² Military expenditure should also depend on the prices of military and civilian output. The price of military output is simply not available for the UK, but its omission may be important: Solomon (2005) finds it to be significant in Canada. In order to economise on the number of regressors, civilian price levels are not included explicitly, but where appropriate real variables are used.

³ The ratio of military personnel to civilian personnel confirms contracted‐out labour replacing in‐house labour, especially between 1980 and 1990. The ratios of military to civilian personnel were: 1970=1.14; 1980=1.16; 1990=1.77; 2000=1.81; 2008=2.1.

⁴ This point about borrowing costs can be misleading since it is included in any Government value for money (VFM) comparisons between in‐house units and private contractors. However, VFM comparisons often failed to allow for behavioural effects (e.g. for flying training simulators, it was assumed that there would be reduced flying time in platforms; but in some cases, such reductions were not attained).

⁵ The UK publishes annual data on the contractors paid £5 million or more by MoD (MoD, 2008). These data are presented in sales bands (e.g. £5–10 million; £50–100 million, etc). The top band is shown as Over £250 million in 1999/2000 and earlier; and over £500 million in 2008; the second band was sales of £100 million to £250 million in 1999/2000 and sales of £250 million to £500 million in 2008: hence, no absolute annual sales figures are published for each contractor’s sales to MoD. BAE was previously British Aerospace and the representation is based on the number of BAE business units shown in the top MoD contractors (e.g. BAE Systems Electronics; BAE Land Systems (Weapons and Vehicles); BAE Systems Surface Fleet Solutions).

⁶ France with a global role had a similar percentage share of GDP.

⁷ The two new aircraft carriers are estimated to cost almost £5 billion for acquisition and it is planned to buy 138 US F‐35 combat aircraft to operate from the carriers. Trident replacement is estimated to cost £15–20 billion for the acquisition of four boats over a 15–20 year period.