Building Britain's Fighting Economy
To keep the peace, we need to prepare for war.
This article was first published in the Britain’s World Memorandum series. Thanks to the Council on Geostrategy team for their helpful edits.
The logic of deterrence means this: preventing a war requires preparing for one. Europe’s post-Second World War peace – the most peaceful era in its history – was founded upon that logic of deterrence. For the United Kingdom (UK) today, deterrence means showing Putin that he would lose dramatically and decisively in any future conflict. To deter him effectively, European North Atlantic Treaty Organisation (NATO) countries need to show they can convert their far greater resources into fighting forces which would guarantee an overwhelming victory. Winning wars is more a matter of economies than armies.
The UK needs a shift in both mindset and production to prevent a future war in Europe. The shift in mindset is recognising that Europe is in a pre-war situation and should prepare for total war in order to prevent one. The production shift means both producing more fighting forces now, in a pre-war situation, and showing how these can be scaled up in the case of total war.
Resources matter. When it comes to any possible conflict with Russia, European NATO has far more resources, with a combined Gross Domestic Product (GDP) around ten times greater than Russia’s. But what is needed is the demonstrated ability to show that NATO Europe can convert its far greater resources into fighting forces quickly enough to beat the Kremlin decisively.
Russia’s economy is straining to keep throwing fighting forces at the current rate in Ukraine. But, when the Kremlin agrees to a ceasefire deal with Kyiv, Putin will use a future period of peace to rearm and attack another Eastern European nation if he believes he could win that war.
Putin has two advantages in preparing for a future conflict. Firstly, the Russian economy has been transformed into maximising the production of fighting forces. Putin is already devoting more of Russia’s GDP to fighting forces, while European NATO must scale up. Secondly, Russia gets a lot more punch for its pound than NATO Europe. The country has become more efficient while producing more defence goods, meaning its price per unit of defence production is far lower. Lower prices of inputs and economies of scale mean the purchasing power of Russia’s military spending is over $400 billion (£298 billion), compared to a cash budget of closer to $100 billion (£74.5 billion), which shows how Russia gets more punch for its pound in defence production.
Strategy and signalling: What role does Britain play in European NATO?
Deciding what role the UK should play in a European NATO fighting force is crucial in preparing for conflict, and is a question for Britain and its European allies. This is what the Strategic Defence Review should cover.
NATO Europe should also prepare for a world where the United States (US) does not play a leading role in the years to come. The US is currently the key provider of air defence, logistics, mass military transport and targeting support.
Setting the clear role for Britain in a European NATO-wide strategy serves as an important signal to defence companies. With a clear strategy, defence companies know what they need to produce now and in the future. The Ministry of Defence (MOD) can write longer contracts to incentivise the right kind of production and innovation at lower costs. With a clear strategic direction, they can also set multiannual budgets and funding mechanisms to incentivise the right kind of production.
Once a clear strategic direction is set, Britain then needs a defence economic strategy which can produce fighting forces now and scale up in the case of conflict. This should set out strategies on production, stockpiles, skills and employment, energy supplies and financing, both in pre-war and total war periods.
Defence economy strategy in the pre-war period
First, the choice of which weapon platforms – vehicles, satellites, drones and so on – are developed and produced must adjust with the changing economics of conflict. The current era of warfare is one where cheap, expendable drones which are worth just over US$1,000 (£750) can now destroy exquisite US$9 million (£6.8 million) tanks. The production cycle for these expendable drones is also rapid, being measured in months. By contrast, it is currently scheduled to take nine years just to upgrade the current fleet of Challenger 2 main battle tanks. What future innovation will look like on the battlefield is unclear, but the choice over what platforms to produce must consider the rapidly changing tradeoff between exquisite and expensive platforms. In the short term, a decision needs to be taken on how many exquisite platforms should be produced, how quickly they can be produced, and how easily they can be destroyed.
Second, NATO Europe urgently needs to build domestic stocks of munitions and platforms to provide an effective deterrent. It also needs to improve its ability to produce rapidly at scale in a total war situation. What the UK produces now and stores, versus what it waits to produce depends, crucially, on the innovation cycle. The key advantage to scaling production is that the cost per unit of production falls. These are classic economies of scale. Ukraine, in particular, is a low-cost producer of defence munitions precisely because it currently has to produce so much.
Britain has a significant shortfall in materiel, having rightly donated huge amounts of munitions and platforms to Ukraine. The logic of deterrence dictates that it now needs to produce far more than is needed just to refill these gaps. The type of stocks which are built now depend on the length of the innovation cycle. Where goods are innovated quickly (such as drones), it makes little sense to produce many of them now. Where goods are innovated slowly (such as 155mm shells), it makes sense to start producing a lot more now and keep them in storage.
Third, mass manufacturing production has ended in the UK, and it is not coming back. Production of munitions and other defence platforms requires specialised skills which require investment now. Currently, there are significant skills shortages in defence production, with bottlenecks in welding, plating and engineering.
Fourth, Britain has some of the highest industrial energy costs in Europe due to a reliance on natural gas to set the wholesale price. Half of this natural gas is also imported. Urgent investment is needed in cleaner, cheaper, home-grown energy as a matter of national security.
Fifth, defence firms, and especially Small and Medium Enterprises (SMEs), find it difficult to secure the financial capital necessary to scale up production. When innovation cycles are so fast, especially in low-cost and expendable platforms, a dynamic SME sector is needed to retain a military advantage (as in Ukraine).
Defence firms find it difficult to secure suppliers due to a lack of long-term contracts (for producers) and guarantees (for lenders). To help companies get the finance they need and reduce the pressure on national budgets, the UK should co-found a multilateral Defence, Security, and Resilience Bank, capitalised with funds from European NATO countries. Like other multilateral banks, participating nations would provide capital to this bank which would raise cheap private capital, with a AAA credit rating, to lend to defence companies across the continent. For SMEs, this would help by underwriting risk and providing guarantees. The Bank would both alleviate financing issues and improve procurement practices.
Defence economic strategy in the total war period
To win a peer conflict with Russia in the future, Britain must prepare an economic strategy for it today.
First, if the UK does enter into peer conflict, then it must be able to scale the production of both exquisite and expendable platforms rapidly. This means being prepared for the existing exquisite platforms to be destroyed relatively quickly by cheap, expendable drones, given the rapid innovation cycle. Britain must also be prepared to scale up production of munitions and platforms rapidly if it enters conflict. This means, where possible, investing in production lines which can be switched on when they are needed. Where this is not possible (e.g., due to a rapid innovation cycle), plans must be made to scale up supply chains rapidly.
Second, if the UK needs to surge effectively and quickly, then it needs to ensure it can rapidly reallocate skilled labour to defence production. It is therefore crucial to know what skills are needed and the transferability between sectors in the future.
Third, in the case of a rapid scale up, there will be a need to direct energy production for defence. At this point, energy consumption limits as well as a producer excess profits tax would be needed.
Finally, at the point of total war, His Majesty’s (HM) Government would need to act radically and decisively to shift resources into defence production over consumption. This would mean taxation, capital controls and consumption limits to ensure GDP was focused on defence production. In a world without supply through Lend-Lease, the financing requirements would be greater than during the Second World War, meaning there would be a correspondingly greater need to secure finance and materiel. The political risk premium attached to British gilts would increase, meaning wealth and excess profit taxes would be required to minimise borrowing requirements.
Conclusion
Preventing a wider conflict in Europe means preparing to win one decisively. Winning a conflict is a matter of economics and strategy. Showing that Putin can be defeated in a peer conflict means showing him that NATO Europe can produce fighting forces far more effectively than Russia can. That is what building Britain’s fighting economy must focus on. If European NATO gets it right, war can be prevented through strength. Get it wrong, and the mistakes of the 20th century will be repeated.
This post was kindly published by the Council on Geostrategy’s online publication Britain’s World
I rate Jeevun and usually agree with him, but not this time.
The main threat to British society comes from a collapsing economic infrastructure inherited from Tory/Liberal Democrat austerity. As the rise of Reform shows, many people don’t believe that established parties can deliver a better life for them and their families and are prepared to turn to dangerous alternatives that could fundamentally change Britain for the worse.
While welcome, the scale of the new resources being put into housebuilding, health and other public services is nowhere near enough to make a significant impact by the next election. Indeed, further cuts are planned in important areas. The Labour Party leadership justify their timidity by arguing the bond markets won’t accept increased spending or borrowing and looks from the sidelines as the Bank of England squeezes the money supply through quantitative tightening and high interest rates. And taxes on the rich can’t be increased, or they will take their money elsewhere. These are the iron laws of treasury orthodoxy.
Yet when it comes to military spending, magically these immutable laws of economic nature no longer apply. Money can always be found for that.
As President Eisenhower pointed out, there will always be voices from the military-industrial complex trying to scare us into spending more. Of course we must be able to defend ourselves from foreign adversaries, but we need a sober analysis of possible threats and a review of deployment of current resources.
If we are mainly concerned with the danger of a war in Europe, why are we committing the navy and other resources in support of American attempts to stifle China? We are a medium-sized country, no longer the centre of a global empire. Let’s pull our forces nearer to home.
As Jeevun points out, the European economies combined are vastly greater than that of Russia. At the start of the Ukraine war, the Russians were ignominiously driven away from Kyiv and a full-scale invasion, and are now fully stretched fighting in the ethnically Russian part of Ukraine. Why do we think that they would remotely be capable of invading another country and holding down its deeply hostile population?
By all means let’s co-ordinate our defence planning more effectively with other European countries, but that doesn’t mean we have to spend more overall on the military. America is not a reliable ally, and we have to be strong enough to resist its pressure to increase defence spending. The main threats to Britain and our way of life are social and economic.