BAE aims to keep all-u-can-eat ticket at MoD pie-shop

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Analysis Fairly soon now, most observers are agreed, the UK Ministry of Defence will have to announce budgetary plans for the coming years. Typically, this is a matter of dull routine. But this year business as usual won't do. The MoD budget rowboat is so overloaded, so near to capsizing, that something big has to be thrown overboard.

On current plans, the MoD will need around £1bn more than its allocated budget - and this assumes substantial Treasury top-ups for the Iraq and Afghan wars. Rumour suggests that the Treasury is very keen to squeeze these "conflict resolution" supplements this year, which is unsurprising given the recent events in the banking sector.

So the MoD needs to do something. The last time the pinch was this tight, in 2004, combat units were cut across all three services to make up the shortfall. Warships were decommissioned, jet squadrons closed down. Astonishingly, despite the fact that the UK had just plunged into one large infantry war and was about to get into another, ten per cent of the army infantry disappeared.

The services really can't take any more trimming of the front line this time. Efforts are underway to reduce the MoD's huge unwieldy back end - there are plans afoot to sack thousands of MoD civil servants, for instance - but these will take years to have much effect, and may actually cost money in the short term due to redundancy payouts.

The only thing left to cut would seem to be equipment-procurement projects, much loved as these are by everyone involved - the service arms who want the kit, the contractors who make it, and the politicians who hope to sustain the British economy and win votes by creating or safeguarding arms-industry jobs.

A lot of military brass, and some retired-officers' groups - with enthusiastic support from the UK arms industry - are campaigning vigorously for the MoD's budget to be significantly enlarged. On the face of it, this isn't wildly unreasonable - British military spending is actually quite small as government budgets go. At less than £35bn, the MoD gets a third of what the NHS does, less than half of what education does. The total defence budget is less than a fifth the amount the Treasury spends on social-protection and social services budgets.*

Even so, the pro-military campaigners are almost certainly living in dreamland if they think there'll be any serious, game-changing rise in the UK defence budget any time soon. Gradual increases are planned in coming years, but these will be called into doubt if the dreaded economic downturn comes. And even if they arrive, they'll largely be eaten up by the development costs of whatever provides the new UK nuclear deterrent after Trident.

What gives?

So the MoD really needs to cut a major equipment project, to the tune of some billions. As a result, the disparate bits of the armed forces are all terrified lest it be their future raison d'etre - or some part of it - which goes. The British arms industry are lobbying terrifically hard even in public, and harder still in private, trying to make sure that their stream of taxpayer cash doesn't get slowed down or cut off.

The arms makers, indeed, are using a tried and tested combination of stick and carrot to get at the politicians of Westminster - and in particular, at Labour politicians. BAE Systems, the global multinational which owns most of the UK arms sector, has applied both kinds of pressure in recent days. First a touch of the whip: BAE announced 600 UK sackings last Friday, as a little foretaste of what would follow if any of its pork got taken away.

At the same time, it is no coincidence that Friday also saw the release of a report (pdf), from analysis outfit Oxford Economics concluding that "BAE Systems is a substantial contributor to the UK economy". The Oxford economists said the company employed more than 35,000 people in the UK, contributing £2.1bn directly to the British GDP. Furthermore, BAE is responsible via "indirect [and] induced" factors for another 70,000 UK jobs and another £3.4bn of GDP.

Quibblers might point out that BAE's own corporate responsibility report for 2006 (pdf) says (p36) that the firm then employed just 31,544 people in the UK - and that 600 of these have just been fired. They might also note that the UK GDP is over a trillion pounds, so that £2bn of GDP from BAE is chickenfeed - 0.2 per cent of the economy. This seems all the more unimpressive when one considers that the company almost always receives the bulk of the UK's £6bn defence-procurement budget in exchange, and plenty more MoD cash for maintenance and other services. And moreover, that if Oxford is as right about the GDP boost as it is about the jobs, the figures are even less impressive.

BAE's critics might also be more than a little sceptical about the other £3.4bn of GDP we seemingly owe to the company, and the 70,000 other jobs. Nobody can deny that BAE keeps various other Brits than its own employees in work: the company commissioned the Oxford Economics report, for instance, keeping the analysts who wrote it off the dole queue for a while. But trusting BAE-commissioned economists on matters of this sort seems to be taking credulity too far. (Though much of the business press, followed by the stock market, seems to have done so.)

So perhaps BAE isn't that important to the UK. It seems certain that, in fact, the UK isn't terribly important to BAE either. The company claims almost 100,000 employees worldwide, and now just over 30 per cent are in Britain. The company has been sacking Brits and buying up American companies for years now. (Just since 2003, BAE has shed 15 per cent of UK employees.) In general, British taxpayers' money given to BAE doesn't, in fact, get spent on British workers and bolster the UK high-tech base. It gets spent overseas, especially in the US. The MoD has bankrolled BAE's move offshore for decades now.

Don't misunderstand us here - you won't find the Reg defence desk arguing that there's anything intrinsically wrong with making weapons and selling them to the accountable militaries of real democracies. But there's a lot wrong with using political arm-twisting based on heavily-massaged figures to force those militaries into buying overpriced gear which they don't need. And if you then take all the cash overseas, you really are adding insult to injury.

But all that to one side - what could the MoD do to straighten its numbers out?

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