Merlin Weekly Macro: Starmer’s defence spending conundrum

How appropriate to be writing this on the 81st anniversary of D-Day and the Allied Landings in Normandy on June 6th 1944. Because today’s column is all about defence and the avoidance of another global conflict. Sadly, it is also the story of a last-minute, match-losing own-goal scored by the Labour government.

Snatching defeat from the jaws of victory

Last week in the context of Rachel Reeves chasing her tail in ever decreasing circles ahead of her imminent spending review, we applied the Mike Tyson aphorism: ‘everyone has a plan until they get punched in the mouth’; of Labour’s fiscal strategy, we concluded ‘who knew the plan involved Labour punching itself in the mouth?’ Only a week later, unbelievably (more accurately, only too believably) it has done it again.

Sir Keir Starmer’s newly published Strategic Defence Review (SDR) is unravelling rapidly. And it is all his own fault. The 2025 SDR was commissioned by Starmer immediately after Labour took office last July. Although the Reviewers were independent (Lord Robertson, an ex-politician and former Secretary General of NATO; Sir Richard Barrons a retired general and former Head of UK Joint Command; and Dr Fiona Hill, a senior foreign policy adviser to various US presidents), the terms, scope and purpose of the Review were prescribed and defined by the government. The timing of the release and the message were all in the government’s hands. How then, has the substance of the report been drowned out by a row about funding and financial commitment?

Intelligence is no bar to stupidity

Starmer’s fanfare was no more than a confirmation of what he had announced in February when the penny began to drop that the SDR’s original terms of reference were insufficient: ‘within the trajectory to 2.5%’ would be boosted to 2.5% of GDP being achieved by 2027 as a firm commitment (three years sooner than Boris’s 2022 pledge to achieve that percentage by 2030), augmented by the new ‘ambition to see 3% by the end of the next parliament’. We spend 2.3% today; by reallocating the Single Intelligence Account (the funding for MI5 & 6 and GCHQ) into defence spending for NATO recognition, he knows he will automatically attain 2.6% without laying out any more cash. The explicit condition for 3% by 2034 remains on the state of the economy and Rachel Reeves’s fiscal headroom.

He has known since at least January that 2.5% of GDP was too low. That figure has been derided as ‘old news’, dismissed out of hand by the Lithuanian defence minister before the SDR was even published. 3.7% was firmly socialised as a new minimum by Secretary General Mark Rutte at the January NATO meeting in Europe; it was known for months that Trump would demand 5%; at the May NATO foreign ministers’ pre-summit meeting, as briefed to the press by US Secretary of State Marco Rubio, 5% was agreed in principle (including by the UK), based on 3.5% on terrestrial defence with a further 1.5% to be allocated to defence infrastructure, space and cyber protection.

Touring the media studios in the pre-publication warm-up, Defence Secretary John Healey was adamant that 3% by the end of the next parliament (i.e. 2034) would be met. Either he was playing politics, was exceeding his authority or had the wrong end of the stick: he was forced quickly to recant and to clarify that 3% was still only an ‘ambition’. It did not augur well.

Starmer repeated publicly that he wants the UK to be leading NATO from the front. Knowing what he did, it surely cannot have been smart politics with his allies to launch a 40,000 word, 140-page strategic policy document proclaiming our commitment to NATO front and foremost, leading with a defence budget that is not only based on ‘old news’ but that as at today is potentially two-and-half percentage points of GDP and a firm commitment short of the mark. That’s daft. Tin-eared? Behind the curve? Obtuse? Timid? Deliberately dilatory? Politically mischievous? Cynical? Who knows.

NATO realpolitik: twist or stick?

But here is what is likely to happen at the annual NATO heads of government summit in The Hague on 24-25 June: Trump is going to turn up, in person, with his size 11 hobnail boots on ready to deliver a kicking to the gathered assembly. He’s going to read the riot act about European and Canadian commitment to security: pay your way or I’m off; and the tariff to keep me in is 5% of GDP, period. The front-line states, the ones directly in the firing line (e.g. Finland, Poland, the Baltics) are going to be banging the same drum in their own interests backing Trump.

NATO works through both consensus and the fundamental principle of ‘shared burden’. Every member pays their way to a common percentage of their GDP (importantly, to avoid the possibility of shirking or free-loading, the NATO budget voting mechanism works on ‘consensus minus one’: no country can vote to support the spending target and then unilaterally opt out on its own account). In the game of high-stakes poker mixed with horse-trading which will follow, members will either take Trump seriously, agree to his demand and several prime ministers and presidents will go home with a political headache and wondering how an empty piggy-bank is going to pay the bills. Starmer will be one of them. Outflanked, he’ll blame it all on Donald Trump when it comes to having either to raise taxes or make unpopular cuts elsewhere. Maybe that was the plan all along: ‘times have changed’ said Rachel Reeves as she raided the Overseas Aid budget three months ago to allow 2.5% on defence spending.

Or, like last year when confronted with the same challenge from Rutte’s predecessor, Jens Stoltenberg, but without Trump waving the big stick, they will demur amid splits. They will call Trump’s bluff. That has significant consequences. Every basis point (hundredth of a percentage point) short of Trump’s minimum raises the risks exponentially: that Trump walks away and that the Russians, Chinese, Iranians and North Koreans see NATO’s lack of agreement and financial commitment as a systemic military and political weakness of which to be quickly taken advantage. Finger-pointing as to who was to blame will be too late: the damage will have been done.

Technological ‘transformation’

The headline initiatives of the SDR have been well covered in the press. Strategically, ‘transformation’ means outwitting the enemy first, then on land at least, beating the living daylights out of him using relatively cheap, throwaway (40%) or reusable weaponry (40%) supported by ‘crewed platforms’ (i.e. armoured vehicles, 20%). Across all three ‘domains’ (air, land, sea), only as a last resort will we place the bulk of our big, shiny kit and our own scarce people directly in harm’s way. It says much that the next Chief of the Defence Staff, Air Chief Marshal Sir Richard Knighton (the current Chief of the Air Staff), is a non-flying engineering specialist. It is a deliberate statement of intent for the way forward.

It prefaces big investment in remote ordnance (multifarious designs of drone), AI, quantum-based communications and control systems and cyber security; a similarly large commitment to production capacity to replenish munitions and missiles shot away in Ukraine (our current military capacity to fight is minimal; to wage a sustained conflict, zero); it sows the seeds of rebalancing the Navy with submarines and upgrading the nuclear deterrent. The RAF is encouraged to acquire more Wedgetail airborne early warning and command/control aircraft (after a five-year capability gap, the long-awaited replacement for the old E7 Sentry AWACS, the one that had the huge rotating frisbee on the top): we are currently due to have three (assumes one in maintenance and two available for operations at any time); the original Wedgetail order was cut from five in 2021 (it remains to be seen if it makes it into service in 2025, and there is speculation recently that the US might abandon the whole programme entirely).

Conventional combat hardware in the form of tanks, jet fighters, frigates and destroyers etc are low priorities. What the SDR does not refer to is the in-hand reduction in the RAF’s Typhoon force by a third, beginning this year and due to be complete by 2028, still going ahead. It refers to ‘more F-35s being required over the next decade’ but nothing more specific either about timing or numbers. Fast jet, combat capacity will decline. Expansion in the regular army is unlikely to happen: the emphasis is on reserve recruitment (good luck with that) and ‘a small uplift in Regular personnel should be considered when funds allow’, i.e. the implication being possibly not before 2034, if at all. The Navy will still be short of surface ships and amphibious assault capacity (scrapped before Christmas, not to be revived). Critically, the SDR will not answer the Americans’ principal anxiety about the UK armed forces: that we cannot field enough resources to bring critical mass to the battlefield; will a proposed ‘10x increase in lethality’ convince them otherwise?

Playing to the Audience

Starmer’s introduction to the SDR makes it clear that ‘My first duty as Prime Minister is to keep the British people safe’. Yet despite the acknowledged ‘hollowing out’ of the armed forces, safety is explicitly fiscally conditional and constrained. Those with short memories will recall when Starmer relaunched his faltering policy programme last Christmas that he had six priorities; in order: 1) improving living standards; 2) making children ‘school ready’; 3) recruiting more police; 4) building 1.5m more houses; 5) developing home-grown clean energy; 6) getting rid of hospital backlogs. Defence did not feature. Those wondering what to make of his and the Chancellor’s commitment today might be less than whelmed that in the same week as it was said that 3% of GDP might be spent on defence in 10 years’ time ‘conditions allowing’, Reeves managed to find £15 billion to spend on buses, trains and trams up north. Bombs and bullets, trains and trams, you pays your money and takes your choice.

Moscow & Beijing: little sweat

While several allies are clearly bemused, much more important is how our adversaries will have interpreted the SDR. It is one of the requirements of the democratic system that we should be open-book (not something Moscow, Beijing, Tehran and especially Pyongyang feel any need to reciprocate); if the SDR was published at breakfast time on Monday, you can be sure that Axis defence analysts had fully digested it by teatime; we certainly had. There will be little here that will have surprised them. They will have noted the increase in missile and shell production, the emphasis on drones and submarines and the drive to increase military lethality ten-fold, including the nuclear upgrade (it is a low bar—the last two live firings of Trident missiles both failed dismally). They will be relaxed at the relatively leisurely pace at which we are planning to achieve 3% of GDP, especially given the couched terms of achieving it at all. That it is below what NATO is likely to demand will please them even more. They will be amused that we really think that this qualifies as being ‘war-clad’ and will be in no hurry to disabuse us of that notion. From a very different perspective, they might well have arrived at the same conclusion as many of our military: too little too late. The Reviewers did their best but had little room for manoeuvre.

If the intelligence assessment is correct, Europe faces the possibility of all-out war with Russia in the next three to five years (Germany’s military chief, Gen Carsten Breuer, this week is only the latest to warn of an attack, in his case estimating four years). Where the SDR potentially fatally mis-assesses the geopolitical risk, it is the high likelihood that it would be a simultaneous conflict with China. The extraordinary Putin-Xi joint ‘Global Stability’ communique issued on 9 May (see Merlin Macro 16 May) makes it very clear that the two countries are acting in concert. NATO will be lucky if the conflict is contained to one region at a time; what we need to be preparing for is a full-scale, multi-theatre Third World War.

As your Merlin Macro correspondent wrote in his “Call to Arms” defence analysis and National Security Blueprint (published by Investment Director Alastair Irvine, Jupiter Insights 21 February 2025), those who would wish us harm are moving faster and with greater intent and intensity than the West, the UK included, is responding. They are rational players: if they are going to attack, it will be when the West is weakest, not its strongest. The risk is immediate and the threat is explicitly not conditional on our financial capacity to resist it.

Parting Shot

Fans of Blackadder will remember the fourth television series, ‘Blackadder Goes Forth’ and the poignant final episode, ‘The Big Push’. General Sir Anthony Cecil Hogmanay Melchett is visiting the trenches before the troops go over the top:

Gen Melchett: ‘Are you looking forward to the big push?’

Pte Baldrick: ‘No sir, I’m absolutely terrified.’

Gen Melchett: ‘The healthy humour of the honest Tommy; don’t worry my boy, if you should falter, Captain Darling and I are behind you.’

Capt. Blackadder: ‘About 35 miles behind you.’ 

In terms of what is needed to restore the UK’s military fighting fortunes and self-reliance, and what NATO is likely to require, that’s roughly how far behind financial reality Starmer’s big defence push is. Technology is a pre-requisite to be a winner today. But you still need critical mass in numbers of personnel and big kit to secure outright victory and the peace afterwards. We’re not there yet. Let’s see if it gets nearer the front line at The Hague in two weeks and then worry about how to pay for it.

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