Piecemeal cuts won’t cover defence spending rises, so what’s the plan?

Anneliese Dodds’s resignation letter, written following the dramatic cuts to the overseas aid budget announced by the prime minister, provides a sharp illustration of some of the pressures facing this government. She accepts that “we must increase spending on defence”, but not that it should be paid for entirely by cuts from her old department. Rather, the cabinet should have discussed “our fiscal rules and approach to taxation”.

And if defence spending is to reach 3 per cent of national income, and more, “it will be impossible to raise the substantial resources needed just through tactical cuts to public spending”.

Surprisingly she doesn’t make the obvious point that, a mere eight months in, the decision is a blatant break of the manifesto commitment to “rebuild Britain’s reputation on international development” and to “restoring development spending at the level of 0.7 per cent of gross national income as soon as fiscal circumstances allow”. I suppose that once you’ve broken your highest-profile pledge on tax increases, breaking other promises comes easy.

But back to the meat of the issue. Dodds was making four substantive points, I think. First that such a severe cut to Official Development Assistance is likely to be damaging both to the UK’s reputation and to those in poor countries who benefit from our aid spending. Second, that she’d like the government to consider tax increases, and third that they could borrow more. Finally, she is saying that long-term increases in defence spending can’t be funded by cutting other bits of spending here and there. More strategic decisions will be required.

On the first of these, the consequences of cutting aid spending, Dodds is surely right. But chopping billions from any departmental budget would have been painful. The prime minister has shown where his priorities lie. They are strikingly different to those of David Cameron who imposed austerity on domestic programmes during the 2010s while raising aid spending in order to reach the internationally agreed target of 0.7 per cent of national income.

Given that a big chunk of spending classified as aid now goes to housing asylum seekers here in the UK, the amount actually spent overseas will end up being considerably less than 0.3 per cent of national income. According to Ian Mitchell of the Centre for Global Development, this is likely to take our aid spending to its lowest level as a fraction of national income for more than 60 years. Quite the turnaround.

Given fiscal pressures, choices had to be made, and this is an understandable one. But it does all smack of rather panicked decision-making. One also wonders what the common thread is between accelerating action on, and spending more on, internationally agreed targets on climate change while further resiling from international commitments on aid. The benefits of our action on climate change are small, diffuse and global. The benefits of aid spending are also relatively small and felt outside this country, but they are more concentrated on particular people, and in fact bigger relative to the actions of other nations. Reduced effort by the UK will be more sharply felt.

What about taxing and borrowing? The clear implication of Dodds’s call to reconsider the fiscal rules is that she believes at least some of the additional defence spending should be funded through borrowing. That is a dangerous illusion. You cannot pay for a permanent increase in spending, in the size of the state, through additional borrowing. Temporary additional spending can be funded that way. Permanent increases need to be paid for through permanent tax increases. What’s more, our debt and deficit position is already more than a little concerning.

It is still, I think, an under-appreciated fact that a good chunk of our current fiscal problem is created by the sheer scale of our debt interest payments, on which we spend far more than on defence and overseas aid combined — well over £100 billion a year into the foreseeable future. As a fraction of national income that’s nearly twice what we got used to in the 2010s and more than at almost any point in the past 70 years.

Higher tax is of course an option — but an option only to be taken in the clear understanding that our tax burden is already at record levels, and heading higher. If we are to use tax to pay for higher spending the need to do so as economically efficiently as possible is paramount. Choosing some of the most economically damaging routes to higher taxes, as the chancellor did in the autumn, is perhaps not the way to go.

Where Dodds is unequivocally right is that we are not going to fund higher defence spending through piecemeal cuts elsewhere. This is a watershed moment. For decades we have funded growth in the welfare state through cuts in defence spending. In 1960 we spent twice as much on defence as on health. As recently as the mid 1980s we spent the same on each. We now spend over three times as much on health as on defence. If we are going to increase defence spending while also increasing spending on health, as surely we will, and on pensions, and on social care, and the rest, then something, somewhere, is going to have to change. We need to plan for that change.

It is more than a little unfortunate that this moment of near consensus on the need for higher defence spending has come at the worst possible time. We are already highly indebted, we are taxed at record levels, our population is ageing, economic growth is dismal. I presume both main parties will go into the next election pledging to raise defence spending further to 3 per cent of national income. On last year’s evidence I’m willing to bet that neither will present an honest assessment of the choices that will entail.

This article was first published in The Times, and is reproduced with kind permission.