Why more defence spending won’t fix Britain’s defence

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In what could have been a comment on Scotland’s low-scoring, but nevertheless clean sheet-keeping win against Haiti in the World Cup, Adam Smith once remarked: ‘Defence is of much more importance than opulence’. But for too long now, Britain has had too little of either. The lack of capable military force has prompted (at the time of writing) two resignations in the last week alone, and might have caused a fatal blow to Keir Starmer.

As so often, though, the politicians and some of the media are capable only of talking in terms of overall quantum. The horror show of defence procurement, and the many tens of billions of taxpayers’ cash lost to it in recent decades of mismanagement, clearly doesn’t stiffen the sinews nor summon up the blood the way I think it should. Nevertheless, the system is widely acknowledged by all without a vested interest to be completely broken. And just funnelling more money through a broken pipe means a commensurate amount more waste if it is left unfixed.

The defence sector is never going to be a pure free market. Just as a monopoly is an industry with a single seller, so a monopsony is a sector with a single buyer. Aside from the handful of libertarians who believe in recreational nukes on principle, no one cavils at this. But some therefore say that there can be no market forces involved in the process. This is, to use an untechnical term, total rot. A single buyer should have decent power to keep costs down by engendering a competitive market of sellers, and the state can also add to this through pulling other levers of government (reducing the tax and regulatory burden, anyone?). This should produce a much better ecosystem than we have.

The major structural procurement weaknesses aren’t even a particularly big mystery. Britain buys badly in four ways. Firstly, a quarter of its spending, by value, is non-competitive and priced as ‘cost plus’ a fixed margin, so efficiency goes unrewarded. Secondly, requirements are gold-plated and forever changing, leaving the taxpayer to fund every revision. Next, oversight is feeble and arrives too late, as the National Audit Office’s £16.9 billion equipment black hole attests (let alone the many billions Dominic Cummings has claimed are missing from the nuclear weapons programme). Finally, and worst of all, a single buyer too often faces a single seller.

This last issue is the stickiest, because one buyer and one seller creates a bilateral monopoly, where there is no price to discover. Unless we really want to increase defence spending to 10% of GDP or so, we aren’t going to generate enough demand for nuclear subs to warrant adding a competitor with separate dockyards. So if the government cannot discover the price, it must create and impose the same discipline the market would through other means: employ better commercial negotiators (on better salaries!), open the contractor’s books and tie profit to delivery rather than guaranteeing it for delay.

Beyond that sticky issue though, it is clear that warfare has changed and that smaller, more easily upgradeable weapons systems are crucial. This should create much less of a headache for the MoD, because the barriers to entry are that much lower. Anduril in America is leading the way on smaller, nimbler firms able to fund huge R&D budgets and be free from the deadening hand of ‘cost plus’, making big returns on better products. The proof is in orbit: NASA’s fixed-price contract with SpaceX has flown astronauts since 2020, while its cost-plus rocket, the Space Launch System, has swallowed more than $13bn and counting, at some $2bn a launch.

There are European and British companies now growing in this space, and classic government levers can and should do much more to foster an ecosystem here. In a world where war looks a bit like who can produce and blow up more of the enemy’s drones, Britain needs to, well, produce and blow up more of the enemy’s drones.

 This will require a renaissance of manufacturing capacity along the whole supply chain. Stalin, not normally quoted favourably in CapX, was right when he is supposed to have said that quantity has a quality all of its own. With Russia planning to make 7 million drones this year, and Britain making less than 100,000, you can see we have a problem.

Liberalising the domestic drone market (for policing, agriculture, transport, logistics etc) would help build a dual use base and allow us to ramp up production naturally. A deep dual-use base is what let America become the Arsenal of Democracy in World War II.

We still have time before the Russians seriously threaten NATO territory. And if we get this right, we can have both defence and opulence.

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