Labour pushes ‘military Keynesianism’ to win support for defence spending

The UK government is increasing defense spending, framing it as "military Keynesianism" to create skilled jobs, particularly outside London, and bolster the British industrial base. Plans include building six new munitions factories creating 1,000 jobs and supporting 800 more, reviving artillery barrel manufacturing, and a long-term commitment to building a fleet of Aukus nuclear-powered submarines supporting 30,000 jobs in Barrow. While proponents argue this boosts the economy and addresses post-industrial decline, critics suggest investments in healthcare, education, or green technologies would be more efficient for job creation and growth.

Analysis

The UK government is strategically pivoting towards increased defence spending, characterizing this policy as "military Keynesianism" aimed at stimulating domestic job creation and bolstering the nation's industrial capacity, particularly in regions outside London. This initiative includes concrete plans such as the construction of six new munitions factories, projected to create 1,000 direct jobs and support an additional 800, alongside the revival of artillery barrel manufacturing in Telford through an agreement with Germany. A significant long-term commitment involves the Aukus nuclear-powered submarine program, expected to support 30,000 jobs in Barrow, commencing in the late 2030s. This shift is partly driven by geopolitical factors, notably Russia's invasion of Ukraine, prompting a reassessment of manufacturing capabilities deemed obsolete post-Cold War. The Defence Secretary, John Healey, explicitly links this to redirecting funds from overseas development aid to reinforce the British industrial base. However, this approach faces criticism regarding its economic efficiency, with studies, such as one by Greenpeace concerning Germany, Italy, and Spain, suggesting that investments in healthcare, education, or green technologies could yield greater job creation and economic growth. Furthermore, the ethical dimension of arms exports is highlighted by the UK's $169 million arms supply to Israel between October and December of the previous year, despite a partial export ban. While the government aims to increase defence spending to 2.5% of GDP by 2027, concerns exist that these funds might be absorbed by existing commitments and cost overruns, potentially limiting resources for new armaments in the short term.

Key Decisions for Investors

• Investors should monitor UK-based defence and industrial companies, as the government's commitment to long-term projects like Aukus submarines and new munitions factories signals sustained investment and potential growth in this sector.
• Consider the fiscal implications of the targeted 2.5% GDP defence spending by 2027, assessing whether new capital expenditure can be robustly funded beyond existing commitments and potential overspends, which could impact the scale and timeline of announced projects.
• Evaluate the ESG risks associated with investments in the defence sector, particularly concerning companies involved in arms exports, given the highlighted ethical controversies and potential for reputational impact stemming from arms sales to conflict regions.