Gunning for economic growth: Is defence spending the answer?

The Herald Scotland

a day ago

And following a commitment last month by the UK as one of the 32 members of NATO, defence spending is set to reach 5% of GDP by 2035. This target - which falls after the next UK general election - is as much about keeping US president Donald Trump in the European defence fold as it is a response to the menace of Vladimir Putin or Xi Jinping.
That's not to dismiss the threats posed by Russia, China and others, which are authentic and should not be ignored. Realpolitik demands mustering the most muscular and united front as possible.
Read more:
In that vein of practicality, the Prime Minister and Chancellor (for the time being, at least) Rachel Reeves have been championing the benefits set to be unleashed by higher military spending as the latest rescue remedy for the UK economy.
"We must now seize a defence dividend for the British people," the Prime Minister declared last month during a visit to the BAE Systems shipyard in Glasgow. "Creating new jobs, skills and community pride across the country."
Not all agree that defence spending is a tonic. Writing for The Herald, professor Karen Bell of the University of Glasgow said the assumption that military investment will deliver economic dividends demands "urgent scrutiny".
"Analysis for the Scottish Government showed military spending has one of the lowest employment multipliers of any public investment," she said.
Prime Minister Sir Keir Starmer speaks during a visit to BAE Systems in June in Glasgow (Image: Andy Buchanan/PA)
"For every pound spent, sectors like care, education and renewable energy produce far more and better-quality employment. At the same time, excess government defence spending comes at the cost of these other socially necessary jobs."
Khem Rogaly, senior research fellow at the thinktank Common Wealth, is among others who support this view. He points out that London and the south of England accounted 56% of Ministry of Defence spending with UK businesses last year, while nearly 40% of the £37.6 billion military equipment budget went to just 10 multinational companies.
BAE is the largest of these suppliers, accounting for roughly 15% of the annual equipment budget.
Its main operations in Scotland include the aforementioned site in Govan along with the Scotstoun shipyard in Glasgow. Its next largest site is at Prestwick airport, where 240 employees provide engineering support for the commercial aircraft built by BAE, a further 160 staff at Hillend near Edinburgh specialising in electronics development, and 100 employees working at RAF Lossiemouth.
Read more:
In a study commissioned by BAE that was published last week, researchers at Oxford Economics determined that the UK Government's aim of delivering a "defence dividend" is already taking effect with BAE spending £550 million with 300 suppliers in Scotland. Throughout the UK, the company was said to have contributed £13.7bn to GDP in 2024, accounting for one in every £200 of economic output.
'With 4,500 employees in Scotland and spending £550m with 300 suppliers, we're proud to support both national security and economic growth," BAE naval ship supply chain director Sean Scott said.
'As one of the UK's largest employers we recognise the impact we have - creating jobs, developing skills and strengthening communities in Scotland and across the country.'
Whatever your view on the merits of a higher defence budget versus those of other public services, the reality is that this additional money is going to be spent if the government holds to its commitments. With that in mind, the engineering industry in Scotland needs to secure as much of this as possible.
Read more:
This point was raised earlier this year by Gerry Hughes, managing director of family-owned KRG Specialist Engineering in Coatbridge. He maintains that more needs to be done to ensure large contractors source locally, ensuring small and medium-sized firms in Scotland benefit from the financial rewards.
'While major defence firms such as BAE Systems, Babcock, and Leonardo have operations in Scotland, much of their supply chain spending still goes elsewhere," Mr Hughes told The Herald.
"The UK Government has committed to directing 25% of defence spending to SMEs, but how much of that truly benefits Scottish businesses? Without stronger links between local firms and defence procurement, Scotland risks missing out on a vital economic opportunity."
The solution? Better support for advanced manufacturing in Scotland with backing from the Scottish and UK Government in skills, innovation and infrastructure to keep firms competitive in defence supply chains. Mr Hughes also argues that Scottish firms should have greater access to Ministry of Defence contracts, declaring that they must be embedded in procurement to prevent local expertise from being overlooked in favour of larger, more established suppliers.
Read more:
'Scotland's engineering excellence is not just history - it is the foundation of a resilient and secure defence industry," he said. "While shipbuilding remains critical, the future of UK defence cannot be confined to the Clyde alone.
"A genuine commitment to local procurement will not only bolster national security but also ensure Scotland's world-class precision engineering and manufacturing capabilities are fully utilised."
So will defence spending turbocharge economic growth? The verdict from analysts at Capital Economics is a conditional "no".
The rise in defence spending that looks likely in many countries across Europe will boost demand and output, but not by as much as some would hope due to several factors such as capacity restraints and the reliance on imports referred to by Mr Hughes. There could be "significant" improvement to productive potential in some economies in the long run, according to Capital Economics, but this will happen over decades and is not guaranteed.
The UK is particularly constrained by a lack of spare capacity, which is all the more reason to ensure no viable firm is overlooked in the distribution of any "defence dividends".