Merlin Weekly Macro: Britain’s war readiness in question

Prefer audio? Listen to the recorded version below.

The annual Battle of Britain Service at Westminster Abbey in September is when the nation gives Thanks and Rededication to the Royal Air Force for seeing off the German aerial onslaught in the summer of 1940 (“their finest hour”, declared Churchill). Had the Luftwaffe succeeded in gaining air superiority, it would have been the prelude to Operation Sealion. Sealion was Hitler’s planned full invasion of the United Kingdom from across the Channel.

Comfort zones: compare and contrast

September 15^th, Battle of Britain Sunday 2024. Picture the scene which the author witnessed first-hand: Rishi Sunak, still leader of the Conservatives, strides up the aisle smiling and relaxed, full of beans despite having just suffered a thumping electoral defeat. The LibDems’ Ed Davy is AWOL, believing that playing at the seaside with his party is more important than national remembrance. New Prime Minister Keir Starmer is there of course, with a landslide but not yet loveless majority behind him he walks hesitantly into the Abbey looking utterly bewildered, almost hunted. The blue uniforms, gold braid by the rope-length, the shining medals, the Standards, the symbolism: this is not his milieu, this is entirely alien. All these people know each other; he is an outsider. It was an early but illuminating indication that for the former human rights lawyer, defence is an area of policy for which Starmer has neither understanding nor natural empathy. He gives the impression of being deeply uncomfortable.

“Hollowed out”

By late summer 1940, after weeks of relentless attack, RAF Fighter Command was almost at breaking point: it was largely Goering’s misguided decision at the beginning of September to scale back the attacks on British airfields and radar stations in favour of bombarding London that gave the Command and its exhausted pilots breathing space and recovery time; the tide turned and the rest is history. Fast forward eight decades and in the mid-2020s, the RAF’s combat asset base is severely diminished in numbers, even before any aerial scrapping has begun. It is actively shrinking as it begins the process of decommissioning the Tranche 1 elements of the Typhoon fleet of fast jets, the ones delivered first and which are now operationally tired and obsolescent. There are no planned replacements. The RAF’s veneer might be highly polished in terms of professionalism and the quality of its remaining kit across all operational capabilities, but it is perilously thin. Scratch the surface and its resilience is negligible.

If that is bad, it is no better for either of the other armed services. In the event of a state-on-state war, in the words of a distinguished general at a recent defence investment forum, the British Army would “die within 10 days”; its operational assets are modest compared with the threat and its ready-use ammunition and ordnance lockers are bare, their contents having been shot away in Ukraine without being replaced. The Royal Navy’s position is dire; it is demonstrably redundant: what very few conventional combat assets it has left are largely unseaworthy and out of commission such that today, putting a single destroyer to sea and keeping it there is both a major feat and front page news (the unfortunately and inappropriately named HMS Ambush, by classification an Astute Class nuclear-powered hunter-killer submarine, is incapable of living up either to her nameplate or her “hunter-killer” description: as at March 12, 2026 she had not been to sea for 42 months according to the specialist Naval Technology website).

Will you just get on with it! 

Since taking office, Starmer has been consistently behind the curve on defence policy. Despite the verbal commitment in the Hague last June to NATO’s new 3.5% of GDP on core defence plus 1.5% on supporting national resilience and security infrastructure, the UK government’s subsequent language has been evasive, hidden behind a smokescreen of obfuscation, imprecision and deliberate confusion. This is merely in the context of doing the absolute minimum required by NATO and giving the strong impression of doing less if we can get away with it; it does not even begin to address the pressing need to restore our own national self-reliance and security. 

It is a consistent theme in these musings that when it comes to defence policy, government decision-making to mitigate the problem is depressingly linear and lacking in any sense of urgency. Absent is any form of leadership. In two-and-a-half months’ time, Labour will have been in office for two years. Progress on defence spending has been nugatory. The current political row about the delayed delivery of the Defence Investment Plan (DIP), already close to 6 months late, is a case in point.  This week, the big guns, two of the three independent authors of his government’s 2025 Strategic Defence Review, turned their fire on Starmer. Lord Robertson, a former Labour SoS for Defence and a well-respected former Secretary General of NATO delivered an excoriating rebuke at the government’s indolence and negligence towards implementing the SDR’s recommendations, all of which notionally were accepted without question in June of last year. Robertson’s colleague, General Sir Richard Barrons, a retired but very forward thinking 4-Star, is now beyond caring whether he himself is regarded as a political pain in the neck and he too was in the media giving the government a piece of his mind. The response from the Treasury is that the government’s expenditure programme is already locked and loaded, it includes the “biggest real terms increase in defence spending” and there is no more money. This despite an in-year £2bn funding gap in the 2025/6 fiscal year, and a reported £28 billion shortfall between what is available for expenditure and what is required to meet the defence need by the end of the decade.

The national security risks are obvious. The warnings that these islands are factually and literally almost defenceless are unexaggerated. Yet far from exerting his authority and taking control in the national interest, Starmer sees his role as no more than a mediator between the Treasury and the MoD. The Chancellor and the Secretary of State for Defence are co-chairs of the Defence Growth Board; it is increasingly clear that the Chancellor alone has the whip hand and defence is not her primary fiscal concern. The OBR’s official spending projections prove the point (the publicly available defence monetary spending plans only go out to the 2028/29 fiscal year): cumulatively over the next four years, the UK will spend £1.423 trillion on welfare; it will spend £272.2 billion on defence. Explicitly we will spend 5.2 times as much on social security as we will on national security.

Less “fizz-bang” than “fizz-phut”

At £62.2 billion, we currently have the sixth biggest defence budget in the world but we have fallen to 32^nd in the international league table of military effectiveness. Crudely, we get very little bang for our buck and what little bang we can generate is rapidly diminishing to a whimper. If the nominal sum is a major bone of contention, the way the defence budget is spent, and how it is accounted for financially, is a national scandal. The propensity for the defence procurement chain to waste time and money is legendary; worse it is seemingly impervious to criticism and incapable of reform (or is it that few have been brave enough to take it on?). Among a long and inglorious list of badly executed projects spanning decades, the National Audit Office identified that in shipbuilding alone, over 10 years the national strategy to deliver warships was “£54.6 billion over the original projected budget”. In context, based on the estimated cost of the five Type 26 frigates ordered by Norway from British yards, that wasted budget overspend would buy 27 ships of the same specification; 27 is more than double the entire number of frigates and destroyers (13) owned by the Royal Navy today.

Sweden points the way

Based on current evidence, the omens for the DIP are not good. However, we live in hope of being proved wrong. If the new National Armaments Director has his wits about him, he will use Sweden’s Defence Material Administration (FMV) as a template. FMV manages the nuts and bolts for defence effective procurement; it does so in a very different way to the UK such that frictional time and financial losses are minimised and operational delivery is maximised (fundamental is individual empowerment and accountability among designated decision-takers). Critically, thinking ahead so it is in control of its own destiny, Sweden also has a strategic contingency plan to look after its own national interests within its new scope of being a NATO member based on scenarios in which the US remains committed to NATO and where it walks away.

Ducking the hard choices

The argument about defence spending is framed as one of “affordability”. That is disingenuous. The reality is that “affordability” is based on political choices. Labour demonstrably prioritises welfare over warfare. National security and resilience suffer as a result. In the past, we have been open to the charge of “free-loading” on the back of America’s defence contribution to Europe. The US may yet indeed walk away. Today, as we drag our feet but other European neighbours grasp the nettle of defence and security, we are open to the charge of repeating the offence, this time “free-loading” on the back of countries such as Germany and Poland.   

In his recent deep dive analysis of America’s new National Security Strategy, Jupiter Merlin Investment Director Alastair Irvine concluded that there were instructive elements other countries would be wise to heed. In the case of the UK those are the economy and energy. Our root problem is an economic system shot-through with imbalances. We are developing an over-reliance on the public sector particularly for marginal employment; we have too many people of working age who are economically inactive and too many who depend on benefits for their income; the private sector is heavily over-reliant on services and is under-invested and under-represented in manufacturing, from both of which flows a constant current account deficit and an imbalance between imports and exports; we have a gross imbalance in the taxation system under which the over-reliance on a very small proportion of asset-rich and well-paid people to pay a disproportionate percentage of income and capital taxes is a structural weakness and a threat to sustainability; we are pursuing an energy strategy that by 2030 will rely 85% on variable renewable sources and only 15% from “reliable” sources (domestic nuclear and imports). Lacking either a strategic plan or even confidence, the only result can be declining strategic relevance. More importantly, it heightens strategic risk.

There is an acute danger of ignoring pragmatic advice because its source is Donald Trump. Nevertheless, in his own way, he is robustly addressing all of these national resilience factors in the USA.  In the UK, Labour clearly has no intention of effecting fundamental repair. That challenge is for whichever government comes next in 2029. Who is up for the fight?

The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each.  With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.