Inflation is the enemy of defence spend ambitions

From the fuel in fighter jets to the clothes on soldiers’ backs, inflation is pushing up the cost of Britain’s military. Boris Johnson urged allies last night to “dig deep” on defence spending to ward off the threat of Vladimir Putin, but his own military is facing two years of real terms spending cuts.

Like many government departments, the soaring rate of inflation is eating into the Ministry of Defence’s budget as the Prime Minister issues his rallying cry.

Departments were allocated the next three years of funding by Rishi Sunak at last year’s Spending Review. But inflation is making budgets far less generous than initially thought and even point to spending cuts in real terms.

The Prime Minister called on the West to boost budgets to at least 2 per cent of GDP – the Nato target – but the UK’S own military is facing cuts both in real terms and as a share of GDP in the coming years.

No10 says spending will hit 2.3 per cent of GDP this year with MOD spending in cash terms equal to £47.9billion. Another £1.3billion has been spent on aid to Ukraine.

However, Nato estimates that after inflation is taken into account spending on the military will actually only be equal to 2.1 per cent of GDP this year, a fall compared to last year. The threat from the Kremlin has prompted defence secretary Ben Wallace to push the Prime Minister for a boost in his budget to 2.5 per cent of GDP by 2028 – which would equate several billions of pounds extra.

Economists warn that under the current plans MOD spending is also falling in real terms in some years.

In cash terms, the MOD budget will rise from £46 billion in 2021-22 to £47.9billion, a 4 per cent jump. It will then edge up to just £48billion in 2023-24 and £48.6billion the following year.

Ben Zaranko, economist at the Institute for Fiscal Studies, says the latest inflation forecasts suggest spending will increase just 0.9 per cent in real terms this year, far less generous than the 2.2 per cent boost initially expected.

He says the MOD budget will then fall in real terms by 2.6 per cent in 2023-24 as inflation squeezes spending and a further 0.6 per cent the following year. Mr Zaranko says: “It was always planned to fall that year [2023-24] – the recent inflation spike has just increased the size of the drop.

“Over the course of the full parliament, though, the MOD budget is still set to increase. By 2024-25 the MOD budget will be 7.6 per cent higher in real terms than in 2019-20.”

Paul Dales, economist at Capital Economics, says that defence spending would need to be £50.4billion in 2022-23 to keep up with consumer prices – though he says a measure for prices of defence spending would be more accurate. “Our forecast that CPI inflation will average 9.5 per cent in 2022-23 suggests that in real terms defence spending will decline by 5.4 per cent this year.”

Nonetheless, Treasury ministers have insisted it will not top up budgets to make up for the inflation squeeze.

To keep defence spending rising in a dangerous new world, Mr Johnson will need to persuade his Chancellor as well as Western allies.