To rearm properly, Britain must borrow

And that is why, though they now know they must rearm, and fast, Europe’s key military powers are still in the dark about how, and to do what. If they are to deter future Russian aggression against a partitioned Ukraine, it could be done by doubling defence as a percentage of GDP over 10 years – so long as the US maintains its commitment to nuclear deterrence. But if this now depends on what flavour cheez-whiz Trump ingested with his McDonald’s, the scale and speed of rearmament must change.

What Trump just demonstrated is that the only powers in the world who are going to enjoy freedom of action in future are continent-scale, modern economies with nuclear weapons and a first-class science base. Europe, collectively, possesses all that – though it is not united. What it does not have, however, are the “strategic enablers”: long-range strike bombers, the detailed satellite intelligence to pick out deep targets in real time; heavy-lift transport and early-warning aircraft.

Above all, Europe lacks the kind of intermediate nuclear weapons that Russia and China have spent the past two decades accumulating: smaller warheads on glide bombs, short-range missiles and even torpedoes. 

The US has 230 small nuclear bombs, with a few dozen stored in European airfields, capable of being mounted on European nations’ aircraft. But Trump controls them. 

France has around 50 small nukes on cruise missiles – but the record of cruise missiles hitting their targets, both in Ukraine-vs-Russia and Iran-vs-Israel, is poor. That means if Europe were left to deter Russian aggression without the absolute certainty of US participation, it would have only an “on/off” switch, whereas Russia would have – to continue the metaphor – a slider control. 

And though nobody in their right mind wants to use nuclear weapons, the reason we have them is to match Russia, step for step, up what experts call the “escalation ladder”. The logic is, “if you drop a small nuclear bomb on a Ukrainian airfield, we can do something likewise and call it quits”.

So the first issue for Starmer, as he returns this week from an inevitably frictional encounter with Trump in Washington DC, is whether British rearmament has to begin with the development of tactical nukes. 

Starmer’s decision to spend 2.5% of GDP on defence is an encouraging start, but it still looks massively inadequate given the new scale of the threat.

Labour’s defence secretary, John Healey, initiated a Strategic Defence Review (SDR) early in the government, and it is supposed to report imminently. But it was constrained in advance by the Treasury, which told the independent panel headed by former Nato chief Lord Robertson to stick to 2.5%, and reportedly threw the draft back into his lap when he didn’t.

There are now major decisions that have to be made – none of which come without political pain. Since the end of the cold war Britain has postured as a global power – a conceit reaching its zenith under Boris Johnson when he declared the “Indo-Pacific Tilt” and ordered the aircraft carrier HMS Queen Elizabeth to sail into the Pacific (while carefully avoiding any disputed area that might annoy the Chinese). 

Britain’s military is designed for global power projection: four nuclear-armed submarines, five nuclear-powered attack subs, an air force equipped with F-35 stealth fighters, two aircraft carriers and some world-class special forces. What it is not designed for is fighting on land in Europe. 

Yet both by temperament – having coined the slogan “Nato First” – and by force of circumstance, that is what the Labour government now must focus on.

When politicians say the army has been “hollowed out”, that’s an understatement. Out of six brigades of the British army, only two could fight the kind of manoeuvre battle that Ukraine had to fight in the first days of the 2022 invasion. Given that the defensive frontage of a Nato brigade is maximum 30km, that’s not a lot of Europe we could actually defend.

So the SDR faces a choice: what military tasks are we going to try to do properly, where and with whom? And what are we going to stop doing? The debate over that, which has raged behind closed doors, has now reached a point where politicians and the public need to own it. Because all versions of the future UK military will cost more. 

Do we want an integrated air and missile defence shield? It would probably cost £10bn. Do we want our own intermediate nukes and supersonic cruise missiles to put them on? Same ballpark. Do we want to build our own stealth combat aircraft, as part of the GCAP project with Italy and Japan? That’s another £12bn, which is “budgeted for” but not allocated.

The good news is, if the UK can match its military capabilities to its strategic intent, and actually begin to do industrial strategy rather than talk about it, there will be immediate multiplier effects on economic growth. We’d need to stop buying over-specified kit designed for British use only, and start producing stuff that is cheaper and more generic – because the lesson of Ukraine is that in an actual war, everything is either destroyed, damaged or modified fast.

As one naval ship designer explained to me: on a frigate built for a global south navy that does not expect to fight, all the cables and pipes run in a neat line down the middle of the corridor; on a Royal Navy frigate everything is tweaked for survival; there are few neat lines. It will take a culture change to get the British armed forces to switch to cheaper, generic equipment, but anyone close to what’s happening in Ukraine’s industrial war effort knows it has to happen.

I’ve spent the past month speaking to SMEs in the UK defence sector: often family firms located in anonymous sheds on the edges of ex-industrial towns. The surprising thing was how many of them said that, if asked, they could scale their output threefold, with the biggest bottleneck being skills.

Wages in the defence sector are relatively high: in 2022 the median defence wage was £42k versus £32k for the rest of manufacturing. These are often unionised jobs, with good in-service training, and productivity – unlike in much of our economy – is massive: the average defence production worker contributes £112k per year to GDP. And this is not just “metal-bashing”, though most metal manufacturing is now done on hi-tech CNC machines that the apprentices have to learn to code. Much of Britain’s defence manufacturing is increasingly digitised, with PhDs working alongside school leavers, and firms hiking R&D in anticipation of rapid export growth.

Reeves has pledged no taxes on working people, and reasserted fiscal rules that would prevent her borrowing. Which puts her in a tight spot. The EU is now considering exempting money borrowed for rearmament from its own tough fiscal rules, but there is no mechanism in the UK set up to permit that. The EU also has the European Stability Mechanism, a rescue fund set up after 2008 that can lend up to €500m – again something the UK doesn’t have access to.

So the Trump bombshell, which demands Britain step up to become the leader and organiser of a project of European strategic autonomy alongside France, has to be the moment where one of Labour’s fiscal principles gives way. And probably the trigger for a rapid convergence with European efforts to coordinate and finance defence.

In the 1930s Britain began rearmament spending at 2.3%. Once defence chiefs realised they were facing war by 1939, they made the bold decision to de-prioritise the army and navy, and to invest in an air force that could deter Germany from declaring war, and hit back if it did. In the end, what they needed was simply an air force that could defend its own airfields in southern England, and they just about managed to get one in time. 

But by 1939 the cost of rearmament was running at 9.7% of GDP. And almost all of that was raised through borrowing. The Treasury hated it, and successfully “rationed” defence spending in the late 1930s; the first attempt to raise a defence loan secretly failed and had to be backstopped by the Bank of England. An attempt to impose a windfall tax on booming defence firms was withdrawn under pressure. 

In his exchanges in the commons with Kemi Badenoch, Starmer made clear that the increase in defence spending would come from cuts elsewhere. But the lesson is clear. You cannot fund serious rearmament through taxation. You have to borrow. The risks of signalling higher borrowing are non-negligible. The bond markets are wary of all state balance sheets, especially those with stagnant growth. But serious investment in defence, with its high productivity, wages and export potential, should allow Reeves to convince the Office for Budget Responsibility that such borrowing would deliver long-term growth, and calm the vigilantes.

Does anyone want to be spending money on nukes, submarines and stealth fighters, when our public services are on their uppers and our infrastructure threadbare? Obviously not. But here’s why we have to. 

By the middle of the second world war, the UK was spending 50% of its GDP on defence, and just 18% on the rest of the public sector. There was no NHS, no welfare state, no state pension bill and no ageing population timebomb. 

Total war, in other words, is impossible for a modern welfare state. That’s why we have to deter it.