Weapons not welfare is poor framing, and so is military Keynesianism

 I was just logging on to make a presentation at a European defence workshop, when Lord George Robertson’s ‘weapons not welfare’ speech broke in the media: "We cannot defend Britain with an ever-expanding welfare budget." 

Like many interested in this sector, I wasn’t expecting the attack on government defence spending to come from the man who led the defence review. When you dig into the speech, his focus was on the pace of change and the delay in publishing the 10-year investment fund. As a former Defence Secretary, he clearly recalled his battles with the Treasury, accusing ‘non-military experts in the Treasury’ of ‘vandalism’. The Treasury has long been sceptical about increasing defence spending, not on ideological grounds but on grounds of deliverability. With some justification, they point to poor defence procurement, which is some way short of ‘vandalism’.

On the warfare versus welfare argument, the Chancellor has signalled her unwillingness to raise taxes to fund additional defence spending. She has warned that ‘difficult choices’ are required to increase defence spending, and other budgets may have to be cut, including welfare. Other ministers have been more explicit, including Wes Streeting, the health secretary, who suggested that welfare cuts could be required because it was critical to deal with the ‘challenge of the world we face’. The UK has already cut international development spending to fund additional defence spending, although there is a broader policy shift towards repurposing development aid.

It may sound like a straightforward trade-off, but in public spending terms, it is more complex. Welfare budgets have mandatory elements and can be demand-led, while defence spending is discretionary. In the US, this has been called the ‘Guns and Butter’ economic model. In the UK, defence is part of ‘final’ public expenditure, funding the armed forces’ pay and the weapons and equipment they use. This consumes money that can’t be allocated elsewhere in the budget and consumes a share of national output when the government spends it. In contrast, the welfare budget consists mainly of ‘transfer payments’ that shift income between households. Alan Shipman explains this in more detail.

Tony Benn famously said, “If we can find the money to kill people, we can find the money to help people.” This leads to the concept of military Keynesianism, which offers an increasingly tempting way for governments to combine the economics of full employment with the rhetoric of national security. The UK defence review implicitly invokes this to justify defence spending, highlighting the positive impact on jobs and local economies. The European Commission has proposed exempting total defence expenditure from EU fiscal rules for four years. Germany has already begun rearmament by suspending its constitutional debt brake. 

The problem with military Keynesianism is that economic growth in pre-WW2 Germany and the USA was rising before warfare drove military expenditure, and the economic multiplier depends on a range of factors – not least how much is procured in the UK rather than imported. Russia is a war economy, yet it is not benefiting from the technological gains typically associated with a war economy. Research shows that the current state of its military industry is one of regression. Production will likely have to be simplified and slowed over the coming years, while Russia will be forced to accept reduced output quality and will suffer from ‘innovation stagnation’ in its technological research and development.

The UK Government would be wise to rely less on military Keynesianism and instead focus on the most significant threats. Despite the Iran War and the growth of China’s military capacity, Russia remains the primary threat. I have just finished reading If Russia Wins by Carlo Masala. He starts with the scenario of an attack on Narva in Estonia after Ukraine has been forced into a land-for-peace deal by the USA. If this sounds fanciful, the Russian Duma has just passed a law letting Putin deploy troops anywhere on Earth to “protect Russian citizens.” Estonia and Latvia both have large Russian-speaking minorities on Russia’s border. Masala’s scenario highlights the likely impotent response from NATO, given pro-Putin governments in Europe and the USA, and the impact of hybrid warfare. Kristan Stoddart's new book, Russia's Hybrid Warfare Offensive Against the West (de Gruyter, 2025), is worth a read on this. We also need to be less reliant on the USA, which, under the current administration, is an unreliable ally.

It is a simple fact that the UK is unprepared for these threats. As Andrew Neal argues, "The country’s leaders need to spell out what these threats mean for the UK. They must also be honest about our minimal defensive capabilities." War may come whether we like it or not, and being unprepared would be reckless. The UK Government can fairly dismiss the opposition’s attacks, as many of the problems facing the UK armed forces stem from decisions made by the Tories.

Instead, the UK Government should focus on ensuring that the necessary extra spending is well spent. As Richard Norton-Taylor argues, “Mandarins in the Ministry of Defence and successive defence secretaries have failed to confront the armed forces’ top brass – senior military figures who have a vested interested in preserving the status quo and continuing to fighting the last battles, reluctant to accept new geopolitical realities and new technologies.” The defence environment is changing rapidly, as evidenced by Ukraine’s use of drones and robots. It is therefore little wonder that the Treasury is reluctant to agree to the MoD’s demands, including signing off on the defence investment plan.

This requires a radical reform of defence procurement, including training and development. The UK’s defence industry is struggling to attract and retain talent at precisely the moment it could be most needed. Almost half of all engineering and technology businesses in the UK report recruitment difficulties. The UK has an engineering and manufacturing graduate share below competitors such as Germany, Japan, Italy and France. The shortfall is costing the UK economy an estimated £1.5bn annually.

In summary, there is no alternative to additional defence spending to counter real threats to our security. However, 'weapons, not welfare' is poor framing, and so is military Keynesianism. Defence spending also needs to be delivered more effectively, along with a revised industrial strategy. 

Pension Investment Conference

 I spent some time at the Pensions UK Investment conference in Edinburgh this week. I still do some consultancy work in the sector, and I am the Chair of a pension fund investment committee. Held during Trump’s war (sorry, ‘operation’; Have I heard that before somewhere?) against Iran, there were a few nervous delegates. However, pension fund investors take a long-term view, and most funds are in pretty good shape. In particular, the much-derided Defined Benefit (DB) schemes.

It is a busy time for pension schemes, with global volatility driven by Trump’s impact on the global economy before the current conflict, the risk of an AI bubble bursting, and significant changes to pension regulation in the UK.

Responsible investing (ESG) has faced increased scrutiny, especially from political sources in the US. The sector was never fully enthusiastic about it, and many fund managers and benchmarks have a noticeable tendency towards greenwashing. However, if the conflict in Iran teaches us anything, it’s that the push towards Net Zero is fundamentally correct. The more we invest in renewables, the more we enhance our domestic energy security. There was a broad political consensus on this until the Tories and Reform Ltd diverted in a Trumpian direction. At the conference, Caroline Lucas wiped the floor with Michael Gove in a debate; Gove, who was once part of that consensus, offered less-than-convincing reasons for his shift. The conference delegates reaffirmed that pension funds should do more to address climate change. Caroline emphasised that, particularly for young people, it makes no sense to invest in ways that harm the planet.

The pensions minister, Torsten Bell, was the keynote speaker. He has had a longer tenure than most pension ministers (not that’s saying a lot), and long may that continue. He is overseeing the biggest pension reform in a generation, and it is long overdue. He made a strong case for issues such as the consolidation of pension funds and UK investment, as well as the actions the government is taking to support them. The English Local Government Pension Scheme is rapidly consolidating its pooling arrangements. Sadly, the Scottish scheme is not reforming at all. We used to lead the way, but now we are stuck in a rut at the expense of effective investment and costs. The minister was asked about this and gave the tactful reply that devolution should be about learning from each other!

There were a few sessions on UK and place-based pension fund investment. An agenda is progressing in England, but much less so in Scotland. It is vital that more of our pension funds invest in the UK economy, where we live and work. Pursuing global investment returns is fine, but we all want to retire into a functioning economy and communities with a high quality of life. There are many examples of good local investment that also generate decent returns. In fact, overseas pension funds are investing in UK infrastructure, so why can’t we? One example is social and affordable housing, which provides stable, long-term investment opportunities that match the stable returns pension funds seek. I did some work on this with Scottish housing associations, which would be a win-win for them and pension funds. There has been some use of this in Scotland, but nowhere near the scale seen elsewhere. Declaring a housing crisis is all very well, but some action would be better.

It's encouraging to see such a bold pension reform in the UK. Some in the sector advocate for a slower approach, but I would encourage the minister to move more rapidly. I also wish we were as bold in Scotland regarding reserved pension policy.

The Good Society

 I was at an event last year where I was asked to list three books that have most influenced my thinking. One of those was The Spirit Level (2009) by Professor Richard Wilkinson and Professor Kate Pickett. 

The Spirit Level sounded the alarm on the corrosive effects of economic injustice. At a time when only a few academics were exploring this issue, it provided a comprehensive analysis linking the negative effects of inequality to a wide range of social ills. It revolutionised the way we looked at, measured and understood the impacts of inequality. Fifteen years on, its warnings ring truer than ever, exacerbated by years of austerity. The authors have published a report, "The Spirit Level at 15, " which highlights many of these issues.

Kate Pickett has also written a new book, The Good Society, which takes her analysis to the present day.

She starts with a (long) definition of a good society. Essentially, a society where everyone's physical and mental health is as good as it could be, by focusing on levelling inequality. Prevention before cure and ensuring the wellbeing of future generations. If those are not your priorities, you will struggle with this book. She argues that society is not improving because a few people are becoming fabulously rich. Tackling poverty and inequality benefits our society as a whole.

This is a book of two halves, not just because I read it on a long train journey to a football match! The first half outlines the blueprints for a good society, focusing on health, care, education, the environment, and justice. The second half explains how to build a good society.

As you would expect, almost every argument is referenced with evidence, and often illustrated with real-world examples. For example, in the city I was born in, Liverpool, half of the children born in 2009 and 2010 had been referred to children’s services by the time they were five. Many of her facts come from well-resourced, government-commissioned reports, with comprehensive recommendations that are repeatedly scuppered by another election, and put on a shelf to gather dust. A story we know only too well in Scotland, with the Christie Commission being just one pertinent example of this theme. Like The Spirit Level, it draws on international examples to show that another world is possible. 

Her solutions are not simply about income, vital though that is, but about engagement. She suggests participatory budgeting,  citizen assemblies and the strengthening of trade unions, alongside a National Institute for Social Change, for “ongoing proper assessment of the effectiveness of proposed social policies, their cost effectiveness”, so that the “then government could act on those things”. Where I part company with her is on the establishment of 'National' services for everything, unless they are limited to frameworks.

In interviews, Pickett has been critical of the incoming Labour government, "Given their mandate for change, I think they could and should have been bolder and faster.” New reviews are fine "unless they sit on the shelf, gathering dust, like so many other government reviews." It would be hard to disagree with that. Jonathan Portes has criticised the book as a "whistle-stop tour of the greatest hits of progressive social policy." Yes, there could be more depth, but that would make the book unreadable and just another report gathering dust on the shelf. The purpose of a book like this is to educate and inspire. On some of his specific criticisms, such as the evidence on Universal Basic Income, he has a point.

It is inevitable that a follow-up book will not be as influential as the original. However, it is important that the case for tackling inequality is refreshed. And this book does just that.

Scottish Budget 2026-27 - patch and mend

 The Scottish Government has published its draft budget for the coming year. I wrote a pre-budget briefing for the Jimmy Reid Foundation outlining the challenges facing the Finance Secretary. I also penned an opinion piece in The National, setting out what I, and Tax Justice Scotland, hoped to see in the Budget. The extra cash in the UK budget meant that the Scottish Government could patch and mend the Scottish Budget this year - at least for resource funding. However, the looming deficit means that we need to start putting Scotland’s finances on a sustainable footing. We need a longer-term view, particularly on tax. 

"We’ve patched, postponed, pretended. Now Scotland must choose: keep letting services quietly crumble, or invest properly in the people and places that make this country tick. That requires an open debate on our willingness to pay for the country we want. And the really big question is whether, in an election year, our politicians are willing to have it."

God loves an optimist, but hoping for tough choices in an election year was probably too much to ask for. Not unlike the UK Budget, what we got was patch-and-mend. This is my quick take.

Not that there are no welcome patches. Breakfast clubs, a bit for housing and college funding; not enough, but some relief for a hard-pressed sector that has been discriminated against for years. The Scottish Living Wage for social care workers is always welcome, but it will take more than that to address staff shortages in the sector. Equally important, there is little sign that the government understands the link between social care and hospital capacity, as set out in yesterday's SHA survey and Audit Scotland report. The increase in the Child Payment is welcome, if insufficient, and at least demonstrates a willingness to address child poverty.

The capital budget is struggling, although, in fairness, this largely reflects the Scottish Government's inadequate borrowing powers. Promises to deliver projects long into the future will convince no one. A two per cent 'real-terms' increase in council funding will hardly touch the sides of the demands on local government services, so difficult tax decisions have just been outsourced to councils. This chart from the SFC highlights the problem. 

There are also some positive tax measures. Taxing private jet departures is something many of us have argued for. Raising the thresholds on basic and intermediate income tax rates retains the progressivity of the Scottish approach and allows the government to claim that 55% of Scots will pay less income tax than the rest of the UK, sustainable or not. The Scottish version of the Mansion Tax won't raise much revenue (nothing next year), and it is a long way from the Council Tax reform the SNP promised as far back as 2007. More patch and mend there. 

Instead of a proper review of business rates and the weak Small Business Bonus scheme, we have another patch, unlikely to satisfy many on either side of this debate. And £1.5bn savings from public service reform - that will be right! The Scottish Fiscal Commission's forecasts don't make great reading either, on the economy, tax, or public finances.

SFC, "Overall, the additional funding available to the Scottish Government for both resource and capital relative to June 2025 is small compared to the size of the Budget and the scale of the fiscal challenges identified by the Scottish Government in its MTFS in June 2025." If the wishful thinking reform savings don't materialise, and most are from health and social care, this could get very serious. As the SFC says, "The progress towards achieving these targets for recurring savings to date, and the number of health boards not breaking even, suggest that it could be challenging for the Scottish Government to deliver the efficiency savings it has incorporated into the Health and Social Care portfolio spending plans."

Overall, this is a classic election-year budget. A few eye-catching sweeteners, a little cash spread around to placate as many people as possible, and promises of great things in years to come. The tough decisions are deferred to the next government.