Podcast: UK Election Kicks Off Britain-Focused Defense Month

Robert Wall:

Welcome to this special episode of Aviation Week's Check 6 podcast. The UK just had parliamentary elections, and with the aerospace and defense industry very much focused on the UK this month with the global air chiefs' conference in less than two weeks, the Royal International Air Tattoo and the Farnborough Air Show, we thought this would be a good moment to look at what is going on in defense over here.

But we'll also zoom out briefly to look at potentially a more important European election, from a defense perspective, one unfolding across the Channel where France, on Sunday, has the second round of parliamentary elections.

To walk you through all this are Tony Osborne, Aviation Week's London Bureau Chief, and our green eye-shade guy, Craig Caffrey, Aviation Week's Head of Defense Markets and Data. I'm Robert Wall, Executive Editor for Defense and Space.

So, in the UK, Labour has won a huge majority. Defense Secretary, Grant Shapps, has lost not just his job, he's lost his seat in Parliament. And former prime minister, Liz Truss, is also out, as are many others. Tony, maybe you can recap briefly for our listeners how defense featured in the campaign and perhaps give us a glimpse of our likely new defense minister. 

Tony Osborne:

Thank you, Robert. Yes, what an exciting evening, and apologies if I sound a little bit bleary-eyed, but I tried to watch the whole thing, particularly for the Liz Truss debacle, that was just a fantastic moment in our history here. It's the first time, actually, that a former serving prime minister has lost her seat in a general election. Normally they disappear. They resign into the distance and go into the sunset, but not in her case. It was quite a downfall for her, just superb.

Anyway, defense has been a part of this, but, look, there's always been this saying in British politics that defense doesn't buy votes. And I think, actually, that's been the case in this election too. I mean, the big buzzwords really have been things like migration, the cost of the National Health Service, education and so on. Defense has really been down low in the list of priorities in the run-up to this, certainly among voters.

But both the key parties, the Conservatives and Labour, have both said that they want to get to 2.5%. If you remember, before the election, Prime Minister Rishi Sunak announced he wanted to raise defense spending to 2.5% of GDP, when he was in Poland. This was part of his grand plan. It was all going to be costed. Labour has been a little less certain on this, and I know Craig will go into this in a little bit more detail, but they've said that they will set out on a path to spending 2.5%, in their manifesto, but they have not specifically said when, whereas the Conservatives said that they would get there by 2030 and they'd laid out a plan to do that.

The other thing that I think will be quite interesting is that Labour wants to try and restore some kind of defense policy or defense relationship with the EU countries. So, we've seen a lot of new initiatives come out of the European Union, things like PESCO, the European Defence Fund, and I think the new Labour government would like to get a level of action on that.

And also a new defense relationship with Germany is very high on the cards, it's been reported this week. We know that the shadow defense secretary... I can just briefly explain what shadow defense secretary is, for, perhaps, those who are not familiar. When a party is in opposition they have a number of spokesmen in key areas. So John Healey, who is the shadow defense spokesman, he will essentially shadow the government's defense secretary who is Grant Shapps, who's obviously lost his job, as Robert said. So there's a good chance that John Healey will take that role in the new government when it's formed in the coming days, perhaps even today. So John Healey has been doing a lot of visits to Germany in recent months and there's talk that there'll be an initiative, or close cooperation with Germany is in the running. 

Robert Wall:

Not to interrupt, but, I mean, the talk in town is really that even though he's not a defense guy by background, folks generally seem to feel like he's taken to the portfolio quite well and seem quite encouraged, if he in fact does get the portfolio. 

Tony Osborne:

Absolutely, I think so too. I mean, yeah, he's not a defense guy by trade. He's not got a military background and so on, but he's been having meetings with various people. He's been having discussions with industry and so on so he seems to be in a position to do that. He's been quite outspoken on a number of defense issues, particularly in recent months, with Grant Shapps. He seems a certain shoo-in, we're not a hundred percent sure, but he seems a shoo-in for the role.

And there's also been some sort of discussion... As well as this closer alignment on the EU, Labour has been talking about looking at the relationship with China, given that that's emerging as a big competitor across the globe. Conservatives were also talking about that as well. And, interestingly, Labour is talking about an industrial strategy, laying out what the UK needs to do in terms of building its defense capability again. If you remember, the Conservative government abandoned plans for a overarching industrial strategy, so Labour wants to bring that back in, give certainty to the defense industry about what is required in the coming years, setting out where the UK should specialize in and perhaps what it should not and be willing to buy from overseas. 

Robert Wall:

Great. Well, thank you. Craig, you're the numbers guy. Help us understand what the situation right now is with the UK defense budget. Not all of our listeners will know. And what would spending 2.5% of GDP mean in today's terms and maybe today's terms are relevant because it's not like the UK has a ton of growth. 

Craig Caffrey:

Yeah, yeah, a really good point. I mean, I think that's one of the things we'll talk about, actually, is the importance of economic growth to all this. But yeah, I'm going to shout numbers at you for a while now, so apologies for that. Shouldn't have data guy on if you don't want numbers shouted at you.

But, so yeah, currently the UK spends £51.7 billion on its core defense budget, spends a total of £64.2 billion, which is $80 billion, something like that, so 2.3% of GDP, just over that, at the moment.

The capital budget, so money that goes towards investing in defense equipment, things like that, is about 19 billion of that, so 36% of that core budget. And procurement itself is about 11 billion.

So plenty of money, but not enough, it would seem, to fund the capabilities you want. So, yeah, like you've both mentioned already, Conservative plan, outlined rather cynically once they really knew they weren't going to be in power, to get defense spending to 2.5% of GDP by 2030. If you did that today, that would increase the core budget.

The core budget, I should say this actually, the core budget is key here. The core budget is the bit of the money that goes to the MOD that pays for military capability. There is all this other kind of defense spending, pensions and aid to Ukraine, things like that, that get added in there. But ultimately that doesn't pay for our own military capability. So core budget is really the key. And getting to 2.5% of GDP you'd probably get that core budget up to about 58 billion, which is an 11% increase on where we are. It would take the total budget to about 70 billion, which is about 9% more.

To get there by 2030, so we did some maths in the background on this when it was announced, that would require something like 3% real-terms growth annually. It would take the budget to about £76 billion by 2030, which is 19% increase. So 3% growth, when you consider that a lot of countries in Europe, especially countries like Sweden, have been growing at 20% a year for the last few years, to try and get to 2%, 3% is really not that much growth. In fact, the defense budget at various points has grown at 3% a year in real terms just on the back of economic growth. So we're not really talking about an exceptional amount of new money being added.

I think the other thing to note is that, as Tony said, that whereas the Conservatives outlined, "We'll do this by 2030," Labour, in their manifesto, say, "We'll do it as soon as we can," in inverted commas. And I think when they originally announced the 2.5% target, they said, "... as soon as resources allow."

So essentially we're talking here about affordability. And a big problem there is that, maybe not as a taxpayer it isn't a problem, but they have said, "We're not going to raise tax." So if they're not going to raise tax, and they've also set all these fiscal rules that mean we want debt to be going down by the end of this parliament, and you've also got competing priorities, they need to strengthen the NHS, they've got to invest in education, they've got to invest in police, there's a cost of living crisis, affordability and how you get to that 2.5% is a bit of a challenge.

One thing to think is that they don't necessarily need to do it at the start of this parliament at all because it's such slow growth that's needed, 3% a year, you could easily back-load that. So maybe that we see this rush as the economy starts to recover, but economic growth is really key to that. 

Robert Wall:

Can I just follow in here quickly on affordability? I mean, if you just go through the list of what's in the plan already, GCAP -  the future fighter program with the Italians and the Japanese - the nuclear submarine program under AUKUS with the US and Australia, the nuclear deterrent, new warships, how does it all fit in even if the budget creeps up a bit? 

Craig Caffrey:

Right. Right. And I think that's the key thing with Labour. So Labour have definitely said the deterrent is safe and if you look at the equipment plan over the next nine years, 30% of the equipment budget is on that deterrent, so you're already [got to account that] nearly a third of everything that's got to be spent there. The other thing is that the election overnight, Labour's performed very well in Scotland and they won't want to jeopardize that going forward. So you'd think the shipbuilding plan is pretty safe as well, so that's your Type 26 and Type 31 frigates, the Type 83 destroyer that's starting to come down the line as well. So we're already counted for a lot there.

And, like I say, GCAP, I get the impression on GCAP that the UK is talking about the amount of money it has available to fund this, but not necessarily the amount of money it'll cost. We're talking about a very big aircraft here. I think that the engines that the Japanese were working on were 24,000 foot-pounds, dry thrust. I think that's similar engine size to an F-22 so we're talking a big aircraft, it's going to be expensive. So, yeah, I think, potentially that needs more partners.

An interesting side point on that is what does Labour election do for a potential Saudi involvement in GCAP? I'd say probably less pro than the Conservatives, but I think they'd still explore that. Bear in mind as well, this is all against the background of it was supposed to be a £17 billion black hole in the equipment plan anyway. So you may get a point where you, and this happened to the big increase we saw in spending when Boris Johnson was in power, it might just get swallowed up by that black hole. Maybe what you're doing is you're putting funding in there so there isn't a black hole anymore. You don't actually get an additional capability. 

Robert Wall:

Yeah. 

Craig Caffrey:

Yeah, I mean, I think that's one other thing. I mean, if you look at air power, I mean, Tony, I'd be interested to know what you think they'll prioritize, but I think they want more A-7s, they need more F-35s, they want more P-8s. They've got the New Medium Helicopter on the way. They've got GCAP. There's supposed to be more A400Ms. So I think the key here, and what I'd love to see, and I'm not sure we will see, is one of the things that Labour have said, is that they will do a new Defense White Paper within 12 months of coming in. And some countries, Australia being one of them, have outlined, "Right, here's the threat, here's the capabilities we need and here's the equipment plan to achieve it and this is how much money this equipment plan takes." And obviously that makes sense because all that links together. What we tend to do is say, "Here's the things we need," but we don't allocate the money. It's just, "If 2% of GDP is enough, then great, because that's what we're allocating." But if it's not, then that's how the black hole opens up. 

Robert Wall:

Well, Tony, maybe you can take it, just walk us through a bit of that. First, what happens in the next few weeks, next few months? And then maybe you can talk a bit about those issues that Craig raised about priorities, maybe what looks safer to you, what looks less safe if it does come down to starting to chop a bit? 

Tony Osborne:

Yeah, so, I mean, actually Prime Minister Keir Starmer, and that's going to take some getting used to saying, there's a lot of things coming in the pipeline in the next few weeks. I mean, you already alluded to that a few minutes ago. You've got big shows, but actually one of the first things that's going to be on Keir Starmer's list is the NATO meeting in Washington next week. And so he's going to have to go to that fresh and be ready to start addressing some of those concerns. We know that the UK may already sign on to several initiatives there, definitely something on deep strike missiles, for example, is one of those areas of interest.

Labour has said that they are going to have a defense review towards the end of the year. Now, Liz Truss instituted one of those. So she instituted a very short update to the previous defense and security review. Labour will probably institute another one over the next six to 12 months to look again at defense needs. That's probably the next big thing to come.

In terms of defense priorities, I think GCAP is going to have to be quite high up on the list, to keep that going. One wonders what comes out of this relationship with Germany that looks likely to be signed off. There's previously been suggestions that maybe we could sucker Germany away from FCAS in Europe. I'm not sure if that's something that's going to happen.

I think the other key priorities, again, as Craig alluded to, are going to be shipbuilding in Scotland, Dreadnought, the nuclear submarine program for the deterrent and AUKUS. And then obviously that sucks up so much money, whether some of the other UK aerospace priorities then get funded is a different matter. I think some of that may have to be re-looked at, five E-7s rather than three. There's a natural progression towards a larger number of those for the defense of UK airspace.

Yeah, hard to know where the defense review will take us. It really all depends on how quickly Labour are going to be willing to build up that defense spending. I think one of the biggest challenges will be, in the coming months, is the fact that the UK has not had decent economic growth for quite some time.

In the first 14 years of the Conservative government we had the austerity which cut back government spending. Then we had Brexit, which has been at an enormous cost to the British economy in terms of impacting trade. It's impacted then, later, on inflation. Following Brexit we've had Covid. And then with the Ukraine war we had the significant cost of allowing people to afford heating their homes. And also the impact of Covid was the fact that the UK paid for a lot of people's incomes during that time to save jobs and save incomes.

So there is now a considerable amount of government debt and the interest on that debt and the debt to income ratio, I think, is now closing in on a hundred percent debt. And at that point nasty things can happen to your economy. So there's a whole challenge around building growth when growth is virtually stagnant and I think that's going to be one of the biggest challenges that the Labour government faces in the coming years. Your thoughts, Craig, Robert? 

Robert Wall:

I totally agree, but I actually wanted to briefly go back to something you were saying earlier, this idea, the stronger relationship between London and Berlin and maybe peeling off the Germans from FCAS, the Franco-German-Spanish Future Combat Aircraft program.

I think that's a great way for us to look at France actually, and particularly because the strong European alliance, usually, between Paris and Berlin has really been fraying. That has not been a healthy relationship and when you look at what is going on politically in Paris now with the elections, that's probably only going to get worse after the president called snap elections. It looks like the far right is going to do very, very well in parliamentary elections. Macron will still be president, but probably, or a good chance, that next week he will not have support in parliament. So that'll make governing very, very hard in his last few years. And what's more is the far right has basically said they are very much emphasizing sovereignty on defense issues, speak, "We are not interested, particularly, in cooperative programs." And so I find that very interesting because I do wonder what does that mean for FCAS? And, Tony, I just wonder if you have any thoughts on that. 

Tony Osborne:

Yeah. It's quite remarkable. I mean, Marine Le Pen's party has scaled back some of its anger against things like NATO and the EU, but, yeah, it seems very determined about national sovereignty programs. The FCAS, MGCS could get impacted. And we know that relations haven't always been that great between France and Germany in recent years and we've also seen the industrial challenges around that. One wonders still, I have however, I've seen several reports saying whether that party can actually achieve the majority that it suggested in the first round is still a big question. But still, yeah, there is that whole question of whether politics could now fracture that program rather than the industrial setup that threatened it previously.

Whether the UK would then try and snatch Germany out of that, who knows? I mean, it has been talked about in British newspapers several times. You would have to literally disassemble the FCAS initiative and also the GCAP initiative and that would just add delay. And that's always been the question about whether we add Saudi Arabia to GCAP and that takes time, it's costly. The German parliamentary process is slow as... They're going to have elections next year as well. So this would all have to be patched up very quickly. Certainly the GCAP wants to achieve its aims and so on. So I don't see it, but maybe closer cooperation between the two programs perhaps. 

Robert Wall:

Well, Tony, you, out of Berlin of course, wrote about how the Germans are really emphasizing and quite a bit, yeah, call it the loyal wingman or whatever we want to call this, and maybe that's an avenue where the UK's path isn't quite so clear yet under GCAP, although it's notionally part of it. Same with the Germans under FCAS, but there does seem to be potential, at least, to imagine something. 

Tony Osborne:

Well, it's quite interesting that Airbus are actually bringing that mock up that they established, that they had at Berlin, to Farnborough and I don't think anyone really expected that to happen. So that's quite an interesting perspective. Maybe Airbus are eyeing an opportunity therefore, realizing that the UK wants that close cooperation with Germany, maybe there's a chance to market that system here too. 

Robert Wall:

Terrific. Yeah, thanks. And, Craig, maybe you can just come on in here and, again, just help our listeners understand a bit. What is the budget situation in France right now? What does it look like under Macron and what's the outlook there? 

Craig Caffrey:

Probably the good news there is there is some stability regardless of what happens. Last summer, so, I think, July last year, excuse my French on this, but they approved the new la Loi de Programmation Militaire, which is the LPM, is the five-year, five, six-year defense spending plan. It essentially dictates what will be spent on defense between 2024 and 2030. That's been approved. And the French tend to stick very closely to their LPMs. So, I think, really the path of the budget's fairly safe. The whole plan, that '24 to '30 plan, included 413 billion euros, which is about $450 billion for that period. So spending, I think, $63 billion as of 2024 rising to 78 billion by 2030. And that's in real terms as well. So 3-4% real-terms growth annually, 23% growth over the period. So not dissimilar to the kinds of growth that the UK is looking to go for for that 2.5%, the difference being that what the French are doing is they're aiming to get their core budget to 2% of GDP and the total spend will go up to around 2.3%, which is where the UK is now.

I think, really, in terms of the impact of Le Pen, it's more a problem for Ukraine because I don't know to what extent she's going to back giving loads of aid to Ukraine, which... But again, I don't think that's a massive deal. The French haven't been a major donor, I think something like $3 billion worth of aid so far. That's compared to Germany's 12 billion-ish, UK about 10 billion, the Nordics have given about 14, the US, what, the latest package was over 60 billion. So, yeah, maybe it's more of a... I wonder how it'll affect the relationship with the EU and its willingness to fund some of those programs. But I don't think that a change of government will make a massive difference to defense spending in France. I think it'll continue along the same lines, I think. 

Tony Osborne:

Yeah, I think one of the first, immediate issues that's going to be facing a Starmer government is dealing with new right-wing parties across Europe. We've got the emergence now of a Center government here in the UK, maybe slightly center-right, almost Conservative like, but across the Channel there could be a right-wing government in France, but they might also have to face a Trump America in the coming years. So we have a new government here, but they are facing a potential dealing with right-wing allies, if you like, across the world. I think that's going to be an extraordinary new challenge for this new government as it emerges. 

Robert Wall:

Absolutely, Tony, we certainly do live in interesting times. Let's leave it there for now. Thank you to all our listeners joining us for this special podcast. And thanks to our producer, Guy Ferneyhough.

And with the Farnborough Airshow coming up, the Riyadh Airshow and the global air chiefs' conference check back for plenty more Check 6 content from the UK this month. So subscribe to us on Apple, Spotify or elsewhere. Cheerio.