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UK: Defence spending cost-neutral, but small fiscal stimulus

UK
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  • Increase defence spending to 2.5% of GDP by 2027. Starmer said that equates to GBP13.4bln more every year on defence from 2027. Previously the target date assumed by the OBR (in its October EFO) was that this would be met by 2029-30 and the OBR noted that this would cost GBP17bln in the final year.
  • He also said that when including intelligence spending, this would be 2.6% of GDP by 2027 (but gave no costings for this).
  • The government has said "it'll be putting in place a new defence reform and efficiency plan" led by my the Chancellor and the Defence Secretary.
  • Starmer says that this would be fully funded by reducing ODA (overseas development assistance i.e. aid) spending to 0.3% of GNI in 2027 (from 0.5%).
  • Note that in October the OBR estimated that the cost to increase the ODA budget to 0.7% of GNI (from 0.5% of GNI) would be GBP6.7bln. As this will now be reduced to 0.3 % of GNI (i.e. 0.4ppt below the 0.7% end of parliament previous target), you do indeed get to the GBP13.4bln Starmer said would be spent on defence.
  • So the numbers do seem to add up at first glance.
  • However, despite the "commitment" to increase defence spending to 3% of GDP in the next parliament, there appears to be no increase in the final two years of this parliament beyond the 2.5% of GDP fully committed to today. And with the fiscal rules not currently looking that far into the future, this 3% spending commitment should not really impact any near-term spending decisions or the fiscal "headroom".
  • Defence spending will likely be focused much more domestically than foreign aid (assuming the UK does not import too many foreign-built munitions, equipment etc). And hence despite net-net having little overall fiscal impact, this would be a marginal fiscal stimulus for the UK economy.
  • Enough to change the outlook for monetary policy? Not hugely, and not in the very near-term at least.
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  • Increase defence spending to 2.5% of GDP by 2027. Starmer said that equates to GBP13.4bln more every year on defence from 2027. Previously the target date assumed by the OBR (in its October EFO) was that this would be met by 2029-30 and the OBR noted that this would cost GBP17bln in the final year.
  • He also said that when including intelligence spending, this would be 2.6% of GDP by 2027 (but gave no costings for this).
  • The government has said "it'll be putting in place a new defence reform and efficiency plan" led by my the Chancellor and the Defence Secretary.
  • Starmer says that this would be fully funded by reducing ODA (overseas development assistance i.e. aid) spending to 0.3% of GNI in 2027 (from 0.5%).
  • Note that in October the OBR estimated that the cost to increase the ODA budget to 0.7% of GNI (from 0.5% of GNI) would be GBP6.7bln. As this will now be reduced to 0.3 % of GNI (i.e. 0.4ppt below the 0.7% end of parliament previous target), you do indeed get to the GBP13.4bln Starmer said would be spent on defence.
  • So the numbers do seem to add up at first glance.
  • However, despite the "commitment" to increase defence spending to 3% of GDP in the next parliament, there appears to be no increase in the final two years of this parliament beyond the 2.5% of GDP fully committed to today. And with the fiscal rules not currently looking that far into the future, this 3% spending commitment should not really impact any near-term spending decisions or the fiscal "headroom".
  • Defence spending will likely be focused much more domestically than foreign aid (assuming the UK does not import too many foreign-built munitions, equipment etc). And hence despite net-net having little overall fiscal impact, this would be a marginal fiscal stimulus for the UK economy.
  • Enough to change the outlook for monetary policy? Not hugely, and not in the very near-term at least.