Fiscal Policy: Defence Spending

Commons Urgent Question

The following Answer to an Urgent Question was given in the House of Commons on Monday 27 January.

“The Government’s plan for change says that we will

‘set out the path to spending 2.5% of GDP on defence in the spring’.

I am genuinely grateful to the honourable Gentleman for asking this Urgent Question. It gives me the opportunity to reiterate what the Prime Minister has said, what the Defence Secretary told the House on Wednesday last week, and what the Minister for Defence Procurement and Industry repeated in the House on Friday, which is that this Government have a cast-iron commitment to spending 2.5% of GDP on defence, and that we are already delivering for defence by increasing defence spending. At our first Budget, we announced an extra £3 billion on spending on defence in the next financial year”.

15:45:00

My Lords, last week I raised my profound concerns about the funding fog surrounding defence. Specifically on the Government’s fiscal policy, I want to ask the Minister the following questions. First, given the recent gloomy projection by the CBI on job losses, what discussions have the Government had with major defence suppliers to assess the impact of the NIC increase on their workforce? Secondly, if the Government really value our Armed Forces personnel, why are they landing families with the full impact of VAT on private school fees, when the continuity of education allowance will meet only part of that increase—and yet they are prepared to exempt United States armed forces personnel in this country from paying VAT on private school fees?

I thank the noble Baroness for her important questions. We are working closely with NATO in developing industrial capability. In particular, we are looking at how we develop interoperability between NATO partners—which, as the noble Baroness will know from her work, is an important consideration—to give us the capabilities we need. The noble Baroness will know that the Government have increased the continuity of education allowance to meet 90% of the cost of school fees, which is line with the consistent use of that policy to meet school fees. On the US military exemption, the VAT rule applies to all businesses supplying services to US forces, so there has been no change in that regard.

My Lords, the Question referred to fiscal policy, and although there may not have been a change in the relationship with the United States, there has been an impact on His Majesty’s Armed Forces. Such children are being sent to private school not through the parental choice that might be made in the civilian sector, but to ensure they can have a secure education while their parents are serving. The cost of education has just gone up through VAT. Is that not a problem? Could the MoD not talk to the Treasury about it?

On VAT on school fees and the impact on military families, as the noble Baroness, Lady Goldie, just pointed out, the Government have increased the continuity of education allowance, which now meets some 90% of the increase in fees that military families will face as a consequence of the VAT rise. That allowance is there to support military families in the way she said, and the VAT increase has been met in a way that is consistent with that policy, through the uplift in the allowance to 90%.

My Lords, the Minister was speaking earlier this afternoon with perspicacity about the changing nature of warfare. Does he agree that when we talk of defence expenditure, we are talking far beyond the MoD budget and the cost of military equipment? New technology threatens and exposes the civilian population as never before, and more directly than at any time in our history. In the Russian attack on Ukraine, it is the attack on its infrastructure, facilities and energy systems that is seen as the main assault, undermining and demoralising the civilian population and destroying any achievements made on the front line. Will the Minister assure us that in looking at our defence expenditure, we are focused on energy and the fact that equipment now exists which would destroy our entire energy system and create social chaos in an amazingly short time?

I thank the noble Lord for his important question. Notwithstanding the debate about the total quantity of defence expenditure, he is right to point out the changing nature of warfare. We are looking to see how we can further protect the underwater cables that bring energy to this country; he might have seen some of the debate that took place last week on that. The RFA “Proteus”, which was bought for the RFA by the previous Government, is one example of how we do that. The defence review is looking at the purchase of a second ship, and various other capabilities are being developed. The noble Lord also made the point about our own critical national infrastructure. There is no doubt that we will have to consider homeland security and how we protect that infrastructure, and the defence review will do that. As I said earlier, hybrid warfare and the way systems are impacted by data and those sorts of attacks also needs to be considered.

My Lords, it is absolutely clear to anyone who knows anything about defence that we need to spend more on our defence forces. I do not think I have come across anybody—including the students at Cambridge the other day—who does not realise that that needs to be done. Presumably, the reason why it is taking time and we are not moving forward is the fiscal policy. Does my noble friend the Minister agree that if you lose a war, things such as the National Health Service, education and social care matter not one jot? Therefore, one ought to think very hard about making sure we prevent a war. One way of doing that is to ensure that we are properly armed, and that needs money.

I congratulate my noble friend on winning the debate at Cambridge; I meant to say that earlier. He makes a point about additional money, and there will be a debate about the overall level. I know my noble friend has his views about the level of defence expenditure. He will know that the Government will set out a pathway to 2.5% in the spring. As part of our increased defence expenditure, we will spend £3 billion extra in the next financial year. Of course, alongside all that, he makes the really important point—again, I have made it from the Dispatch Box—that part of the way you prevent war is by preparing for war. That is an unfortunate state of affairs. Deterrence is important. As a country and in our alliances across the world, we need to consider not only how we fight wars but how we prevent them, and deterrence has to be part of that.

The noble Lord explained what the Government are doing to compensate service personnel who might be penalised by the VAT increase. Exactly the same problem arises with diplomats, who, again, necessarily have no choice except to educate their children privately. What are the Government doing to compensate people working in the FCDO?

I will have to write to the noble Lord about that to make sure that I do not inadvertently misinform the House. If he will allow me, I will write to him with a specific answer to that and place a copy in the Library.

My Lords, my noble friend will probably know that the Joint Committee on the National Security Strategy, of which I have been a member, is going to undertake a review of undersea cables and other areas of what we now call critical national infrastructure. Would he agree that, as a result of inquiries such as this into areas of defence that previously have not been considered in such great detail, our friends in the Treasury will have to acknowledge that modern defence threats will require novel Treasury solutions?

Whatever the Treasury may or may not think, and whatever the level of defence spending should or should not be, one of the important things coming out of the debates and discussions and questions from all parts of the House is that Ukraine has shown that the nature of warfare is changing, and the way we fought wars in the past is perhaps no longer appropriate. Of course, there is a need for mass and for traditional warfare. But the way in which the application of drones has changed the nature of warfare; the attacks on underwater cables that my noble friend pointed out; the threats to our homeland and to critical national infrastructure that the noble Lord, Lord Howell, referred to; and the data attacks and hybrid warfare that other noble Lords have referred to—all of these require us to discuss not only what the level of expenditure should be, but how we meet those challenges in a way that is relevant to the threats we face now, not those we faced in the past.

My Lords, I agree with the Minister that prevention is by far the best investment. The UK has many strategic interests around the globe in areas where there are increased levels of fragile and potentially conflict-afflicted states, which will require us to have more defence resource. Can the Minister please say that the reporting last week that the Government are now projected to cut by one-third conflict prevention work in development assistance funding was an error?

I read those reports, as did the noble Lord—I know that he takes a keen interest in all these matters. Whatever the rights and wrongs of those reports, we should reflect on what this country does to prevent conflicts in different parts of the world. The noble Lord has been to many countries where the UK, along with its allies, is preventing starvation, conflict and ethnic cleansing of one sort or another. I was in Nigeria last week and saw the immense activity of the British military and others to stabilise a country that faces real threat from the Sahel and from terrorists such as Boko Haram, Islamic State’s West Africa Province and others. I accept that there are sometimes questions about what is or is not being done, and what changes are being made to government expenditure in difficult times. But, without trying to deflect from difficult decisions or to say that we should not discuss cuts, sometimes we should, as a country, talk about what we actually do, rather than about the challenges we face.