June 4, 2025 • 29 mins
As fighting in Ukraine drags on and Donald Trump demands that Europe take greater responsibility for its own security, the UK is confronting the hard reality of rebuilding its military strength. The challenge lies in overcoming years of underinvestment, failed contracts, and recruitment struggles. While European allies are pledging billions of euros to boost domestic defense manufacturing, the UK is scrambling to catch up in an industry it once dominated. In this special podcast, Daybreak Europe host Caroline Hepker speaks with CEOs and industry experts, along with our Political Correspondent Ellen Milligan and Bloomberg’s Chief UK Economist Dan Hanson, to assess whether Britain has what it takes to realize its ambition of once again becoming a major military power.
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:13):
We have reports of Russian troops and tanks crossing the
border from several.
Speaker 3 (00:18):
Locations from Crimea, occupied Crimea and to the rest of Ukraine.
Speaker 4 (00:24):
The circumstances require firm and immediate actions from US.
Speaker 5 (00:28):
I decided to conduct a special military operation.
Speaker 6 (00:32):
This is as dangerous as it gets.
Speaker 4 (00:34):
This is the most dangerous moment in Europe since the
end of the Second World War.
Speaker 2 (00:37):
The only thing that Vladimir Putin understands is power. You
show any kind of a weakness and he will basically
go after you.
Speaker 7 (00:45):
One of the presidents of a big country stood up said, well, Sarah,
if we don't pay and we're attacked by Russia, will
you protect us?
Speaker 6 (00:53):
I said no, I would not protect you.
Speaker 7 (00:55):
In fact, I would encourage them to do whatever the
hell they want.
Speaker 1 (00:58):
You gotta pay, pay your bills.
Speaker 6 (01:01):
You have nice aution and don't feel now, but you
will feel it in the future.
Speaker 7 (01:07):
You don't have the cards right now with us, you
start having right now.
Speaker 5 (01:15):
Moments like this. In our past, Britain has stood up
to be counted. It has come together and it has
demonstrated strength, and that is what the security of this
country needs now and it is what this government will deliver.
Speaker 8 (01:37):
Russia's war in Ukraine was a defining moment for Europe.
So was President Trump backing away from the US's international role.
Welcome to this special podcast on Britain's defense industry. I'm
Caroline HEPKEA. We know the threats are growing and the
world is rearming. All NATO countries increase spending on defense
(01:58):
last year, and more is coming. The UK government has
promised the largest sustained increase since the Cold War in
defense spending as part of the Strategic Defense Review. The
government wants to get the military to a position of
war fighting readiness. Here's the Prime Minister kissed Armer.
Speaker 5 (02:18):
When we are being directly threatened by states with advanced
military forces, the most effective way to deter them is
to be ready and frankly, to show them that we're
ready to deliver peace through strength.
Speaker 8 (02:35):
But the Prime Minister's target of spending three percent of
Britain's GDP on defense in the next parliament remains fluid.
NATO members are discussing an even bigger goal, and the
UK's preliminary deal to work with the EU and get
UK defense companies access to the EU's one hundred and
fifty billion euro security fund is still subject to negotiation,
(03:00):
the defense base is suddenly moving fast. On this podcast,
we'll discuss how serious Britain is about rearmament, where the
industry is ready to scale up with three of Britain's
largest defense contractors, and I'll also be joined by Bloomberg's
Ellen Milligan, who covers UK foreign policy and defense and
(03:21):
whom I've collaborated with on this story, and alongside Bloomberg's
chief UK economist Dan Hanson with his analysis about how
feasible a surgeon defense spending really is. But before that,
what are the main challenges for industry today compared to
the conflicts of the past.
Speaker 6 (03:41):
Inspired by the leadership of mister Churchill, our war factories
work day and night in a desperate effort to re
equip our part is before the impending invasion was lunched.
Speaker 2 (03:50):
We all know the story of those days.
Speaker 8 (03:52):
Wartime spending in Britain peaked in nineteen forty five at
more than half of all economic outputs. By nineteen fifty
three it was still eleven percent of GDP, but over
the decades that spending has plunged with brief peaks around
the Falklands, War, Iraq and Afghanistan. Now there are efforts
(04:14):
to revive Britain's military industrial base and to produce more
home grown weapons.
Speaker 4 (04:23):
So you're going to go into the forge area.
Speaker 7 (04:26):
It's all done at eleven hundred degree sea, so obviously
is red hot material.
Speaker 8 (04:31):
They make all sorts of shells here at the BA
Systems factory in Washington in the northeast of England, including
these one five to five millimeter shells which are just
about almost a meter long, look like a bit of
a tin can or a kind of a water bottle
that then gets filled with explosives and a propellant. BA
(04:51):
Systems is Britain's largest defense contractor. Steve Cardu has helped
develop the business.
Speaker 7 (04:58):
We are expanding our one five to five capacity by
sixty year PROLD, so that's a combination of some additional
machining lines here at Washington on the northeast and then
the brand new explosive filling and packing facility at GLASGOWYDE.
And the real focus to us really is how do
we expand our UK renition's capacity and also how do
(05:21):
we generate resilience in our industrial base and also our
supply chaw.
Speaker 8 (05:25):
How prepared are you?
Speaker 7 (05:27):
How ready I you know the preparation that we're doing
around our upscaling of of our production capability, the underpinning
of our supply chains explosed to some propellants. That is
all geared around what we anticipate the global environment's going
to need.
Speaker 8 (05:45):
As Steve kard You explains this, BAE System's factory is
working three shifts levels last scene post Iraq and Afghanistan.
They're making artillery shells for the British Army and Ukraine.
There is a growing realization, according to BAE that munitions
(06:05):
are the weapon needed in war, but BAE Systems wants
firmer spending commitments from customers. In other words, the UK's
Ministry of Defense, the mod's own report two years ago
found a seventeen billion pound equipment black hole. Alan West
(06:27):
has had a long career in the military and beyond.
He was first Sea Lord in charge of the Navy
and Royal Marines, chief of Defense Intelligence, and a government minister.
Admiral Lord West describes the poor state of the British military.
Speaker 6 (06:44):
Our cupboard is bear in terms of extra weapons, extra ammunition,
extra missiles, things like that we've cut down on training,
We've not really had enough money to really focus hard
on recruiting and on people. When you add all these
things together, the hollowing out has been catastrophe.
Speaker 8 (07:00):
Actually, how hard then, from that pretty long list and
disastrous state of affairs, as you say, a bare cupboard,
how hard do you think it's going to be to rebuild?
Speaker 6 (07:10):
It's going to be extremely difficult, And I think some
politicians and people in Whitehall are deluding themselves about how
quickly it can be done.
Speaker 8 (07:21):
Prime Minister Kirs Starmer has pledged defense spending will reach
two and a half percent of GDP by twenty twenty seven,
up from two point three percent currently, and then get
to three percent over the next decade. But Lord West
says those plans are too tentative.
Speaker 6 (07:39):
The way to do this is rather like when in
nineteen forty six seven Levin said to atle we have
got to have an atomic bomb, there's no question about it,
and the Prime Minister and the Defense Secretary and the
Foreign secretary in cabinet said, right, we're going to do that,
and they found the money, and the country was pretty broke.
They found the money and spent the mon to get
(08:00):
an atomic bomb, and that meant cutting things that were
very close to their heart like the new welfare stage
and health service and things. I'm afraid this government, if
it is taking defense seriously, has to say right, we
are going to spend this money and they need to
start doing it now.
Speaker 8 (08:17):
The urgency is reflected by Leonardo UK, part of the
Italian Global Defence Giant, which focuses on combat air projects
like the Eurofighter Typhoon, with hubs in Newcastle, Jovill and Edinburgh.
Clive Higgins is UK Chair and CEO. He told me
he recently hosted Prime Minister Starmer for a visit.
Speaker 1 (08:39):
We've needed to increase defense spending for some time. I
would say the threat vector is increased, so that's driven
that need to change. So now increasing to two point
five potentially three percent in the next parliament absolutely critical.
We've seen a lot of transformation coming through defense in
the UK in particular, so you're seeing the structures of
(09:01):
defense in government transforming.
Speaker 6 (09:03):
Now.
Speaker 1 (09:04):
They want more pace, they want more agility, the flow
of funding has to be improved. And also recognizing that
post COVID, where we recognize that supply chain resilience was
a key attribute. We need that in defense as well.
So I think the ambitions you've seen from the UK
government with announcements on significant increases of defense bending are
really positive, but that needs to translate in terms of
(09:24):
reality on the ground.
Speaker 8 (09:27):
The government has now released its Strategic Defense Review, with
the Prime Minister outlining plans to overhaul the British military,
including expanding the nuclear Deterrent, but still with scant details
about how it will be paid for. Ben Bridge's Chair
of Airbus, Defense and Aerospace UK.
Speaker 4 (09:51):
A lot of the rhetoric, if you like, is reflecting
not only the importance of defense and the needs to
invest in defense and spend more on defense, but to
do that in the U. So I think this is
the year where we and the UK defense industry will
hope to see those words turning into action.
Speaker 8 (10:07):
So you think it's a pivotal year. Then are you
doing anything to ramp up in the UK now or
are you awaiting all of those reviews and the contracts
to arrive.
Speaker 4 (10:17):
The question, I guess will be what further opportunities or
requirements will come from the government and will be ready
to ramp up as you say, and ready to increase
and invest ourselves if that were to happen.
Speaker 8 (10:30):
So airbos in the UK is poised but paused. But
Marion Mesmer, senior researcher at Chatham House, explains that other
NATO countries are not standing still.
Speaker 9 (10:42):
For a long time, the UK was one of the
leaders when it came to defense spending in natal, but
actually ever since the for scale Russian invasion in twenty
twenty two, other native member states, especially those along NATO's
eastern border with Russia, have increased defense spending much more
rapidly than the UK. So the UK, with spending around
(11:02):
two point five percent of GDP and intentions to spend
two point seven perhaps over the next several years, is
actually lagging far behind countries like Poland, which are already
spending in excess of four percent of GDP and are
also intending to spend more.
Speaker 8 (11:18):
And so as Europe and NATO ramp up, there is
also the difficult question of what Britain should be preparing
for when it comes to global threats. Marian Mesmer is
clear what may be expected from Britain.
Speaker 9 (11:32):
We know that Russia wants to continue to essentially increase
its own self image as a great power, so I
think the threat from Russia is really real, and what
we know about Russian strategic thinking is that if they
were to attack Natal, a likely line of attack would
be in the Baltic States, where the UK has a presence.
So the UK essentially needs to be ready to help
(11:55):
defend the Baltic States.
Speaker 8 (11:59):
BAE Systems, they are firing up the forges. Gavin Krimmings
from the Munitions Division tells me they're working on creating
sovereign defense supplies for the likes of explosives.
Speaker 3 (12:14):
There are times where we do scale up to kind
of three shift work in and for the last time
all the factories were kind of at Bakala. Scale was
probably paused Iraq, Afghanistan.
Speaker 8 (12:26):
The government has plans for six new munitions factories to
come soon. The ambition is now to move to a
position of war fighting readiness, but with the growing threat
of war, there are questions about whether the UK is
moving fast enough and how the country will pay for it.
(12:50):
So a visit to the BAE Systems factory there in Washington,
Tyne and we're well with me on that visit was
Bloomberg's Ellen Milligan, who covers you CA foreign policy and
defense at Bloomberg and she's with me in the studio. Ellen,
good to have you with me. Incidentally, the village where
that factory is located also is home to the ancestral
(13:14):
home of the first US President, George Washington, which I
thought felt quite significant at the time. And it's really
at the heart of kind of industrial Britain, near the
old shipbuilding yards, near the Nissan factory in Sunderland that
still churns out, you know, a huge number of vehicles.
What did you make of that visit, going to see
(13:34):
the factory, going to see those shells, It did bring
it home to us the seriousness of this moment.
Speaker 10 (13:42):
Yeah, it was amazing to see the production line because
I don't think either of us had seen that in
person before. You write so much about the shortage of
these one five to five shells that BAA is making,
and actually to go and see the production line and
the people working on that, and how they're ramping up
production and they're moving to a twenty four to seven
(14:02):
shift pattern as well for the first time since Iraq.
And this plays into the UK's new defense strategy, which
is all about creating a stronger industrial base to ramp
up production of weapons and of shells if needed, because
the UK stockbars have almost completely run dry due to
(14:23):
under investment and support that Britain has given to Ukraine
throughout the war as well. So the UK now wants
to create an always on munitions production, which actually BAE
work quicker to that than the UK government were, so
that there is a constant line of production. So twenty
four to seven these shells are being made and that
(14:45):
will enable them to massively increase their stockpiles, both for
the British Army and to give to Ukraine.
Speaker 8 (14:52):
So re arming for Britain is now the destination. Ellen.
The question is how does Britain get there.
Speaker 10 (15:00):
Unveiled this actually very ambitious strategy to get there. It
encompasses rebuilding Britain's stockpiles both of munitions and of weapons,
which have run dry due to under investment over many decades,
but also due to the support that we've been giving Ukraine.
They want to create an always on munitions production, for example,
(15:22):
that can be ramped up quickly if needed if Britain
is confronted with war. For example, they want to expand
their submarine fleet, they want to expand their nuclear deterrent.
They want to provide a small uplift to the army
even in the next decade. So really ambitious plan, but
has been met by some criticism over how they will
(15:45):
fund it. There is a debate over whether their target
to reach three percent of GDP on defense spending by
twenty thirty four, whether that's an ambition or a firm commitment.
Over the weekend, it transpired that it was a commitment,
and then just a day later it transpired it was
back to being an ambition, and Kistama was very clear
(16:06):
about that. Meanwhile, we've got NATO set to up its
target to three point five percent by potentially as soon
as twenty thirty two. So there's this gap here that
remains between the UK's rhetoric and actually how it's going
to fun this in the foam commitments behind that.
Speaker 8 (16:23):
This is also the first of the major defense moments
that the industry is thinking about for the whole of
this year. You mentioned the NATO Defense Minister's meeting, but
there are another number of steps that we're going to
see in the UK this year.
Speaker 10 (16:40):
Yeah, we've got this big NATO summit coming up where
this new target will be agreed and the UK will
undoubtedly have to sign up to that. You know, it
was very clear this week that it wanted to take
a lead in a more lethal NATO. I don't know
how you can take a lead in NATO if you're
not signed up to the new commitments. And then we've
a number of other reviews coming out on Britain's security
(17:04):
strategy and the national security threats, and those will come
out later in the year. We've got an audit on
Britain's relationship with China, which, alongside Russia, was mentioned quite
a lot in the review this week in the Strategic
Defense Review, because of their nuclear power and the ramp
up of their military that we've been seeing over the
last couple of decades. So there are a number of
(17:26):
moments coming up, and I think the UK government is
conscious that this isn't the end point, this is actually
the beginning point. They want it to be a national conversation,
a national effort and endeavor to get the UK back
on a war footing.
Speaker 8 (17:42):
Okay, well, let's broaden out the conversation, then shall we.
Bloomberg's chief UK economist, Dan Hanson is with us and
he's been analyzing these defense spending plans. Dan good to
speak to you. You've looked at the costs and it's
one thing to have an ambitious plan, it's another to
liver on it. How does Britain pay for this?
Speaker 2 (18:03):
It's a really challenging backdrop. All of these demands on
defense are coming at a time when there is very
very little physical space in the UK. If you go
back even just to March, where the Office for Budget
Responsibility put out its latest forecast, it's said there that
lifting defense spending just a three percent of GDP, which is,
(18:24):
as Ellen said, the ambition of the government. It's not
not a commitment from two and a half percent of GDP.
Just lifting it by effectively half percent of GDP would
cost seventeen billion pounds by twenty thirty or in twenty thirty.
So that's an enormous amount of money. I mean, just
to put some context around that, that's about two p
on the basic rate of income tax if you're thinking
(18:46):
about paying for that in terms of tax increases. So
it's an enormous amount of money just to move to
that three percent of GDP. And of course, as Ellen
is set out there, there calls from NATO to think
about three and a half percent center GDP. We'll find
out more about that later this month. And also, of
course there's still this five percent of GDP target that
(19:07):
Donald Trump has been speaking about. Of course, the three
and a half percent sort of fits into that, and
I think a looser definition of defense spending that NATO
are talking about. But there are these huge demands, and
as I say, it's all coming at a time when
the public finances are extremely stretched.
Speaker 8 (19:22):
And so in terms of the government's twin pledges, the
government in the UK also wants that defense spending to
grow the British economy. I wonder whether the government can
do both at the same time.
Speaker 2 (19:38):
Yeah, it's a really good question, and I think there's
a there's a real debate about whether defense spending is
this sort of like this panacea for the UK's growth challenge.
You know, we've had very anemic growth in the UK
for a long time, and the previous government and this
government really looking for ways to turbo charge the economy.
I think from where I'm sitting, it's almost certain that
(20:02):
this will give a short term boost to the economy.
So boosting defense spending will lift the economy in the
near term, and that's obviously a positive thing. The real
question is will it produce lasting benefits? So will it
lift the level of GDP permanently? And I think there
are there's a lot more uncertainty, I think it's fair
(20:22):
to say, And a lot depends on how the money
is spent. So if you focus spending very much on
domestically driven investment on research and development, the academic evidence
told you that that gives you a much better chance
of boosting the economy in the longer term as opposed
to say, spending the money on day to day spending.
(20:44):
And the government is clearly focused on that side of
the ledger. But I think you know, for us at least,
the jury's out on whether this is the sort of
the answer, the sort of one answer to Britain's growth challenge.
Speaker 1 (20:56):
Ellen.
Speaker 8 (20:57):
The UK also has a particular issue because it is
one of the few NATO members in Europe that has
a nuclear deterrent and the government is keen to renew
and to expand in some senses the nuclear deterrent, but
it takes up about half of the mod's budget. How again,
is Britain going to deliver on that kind of additional spending.
Speaker 10 (21:20):
I think this was actually the most significant strategic shift
this week in the review because it called on the
UK to expand its nuclear deterrance in NATO, and Trump
was not mentioned in this review, but clearly he was
overshadowing it because there are doubts is the US pulls
its security assurances from Europe that if a circumstance arises
(21:44):
where Europe would want the US nuclear deterrents to protect them,
whether Trump would allow that to happen. The UK and
France are the only European nations inside NATO that have
a nuclear deterrent, but France hasn't yet commit to allowing
their sovereign nuclear deterrent to cover the whole of Europe.
They are now having those discussions. They're having those discussions
(22:07):
with other European allies, so that's significant.
Speaker 8 (22:09):
But the UK is.
Speaker 10 (22:11):
The only European niche that has committed to using its
deterrence over the whole of Europe, over the continent within NATO.
So now the UK wants to look at expanding its capability.
Right now, it just has submarines that can launch nukes,
but they're looking at buying jets that can launch nukes,
(22:31):
for example, and there's other things like I think Russia
has some capability that allows them to fire nukes of trains.
I don't think the UK is quite looking at that.
But there's ways to diversify the deterrent. That is really
significant one because it shows that the UK is fearful
of the reliance of the US and so it's really expensive.
As you say, Trident takes up a huge chunk of
(22:53):
the UK's defense budget and it was really interesting to
hear actually down there talk about the seventeen billion required
to get to that three percent, because that's the exact
amount that was identified as a black hole in the
UK Zone equipment plan a couple of years ago. That's
slightly separate to the nuclear deterrent, but it shows where
those financial gaps are. The UK, for the first time
is unveiled exactly what the investment plans in tried and are.
(23:17):
They said that they will commit fifteen billion pounds to
its warhead program. I mean that's a huge amount of money.
So when you're talking about the gap between the rhetoric
and the actual funding, these are the kinds of amounts
we're talking about huge amounts there.
Speaker 8 (23:30):
So how does the government make these sums add up?
Speaker 2 (23:34):
The government has experienced this pretty challenging time, I would
say on the fiscal front in terms of you had
the budget in October where the you know, you saw
guilt yields rise quite sharply. After that, we had a
bit of a fright at the start of January, and
I think investors globally are really watching governments for how
(23:55):
they how they tackle fiscal policy and how they think
about fiscal sustainability. So my sort of starting point for
this is that it's very unlikely that the UK is
going to get away with boring all of this extra
money that it needs to fund these defense commitments. So
that leaves two options. One is reduced spending on other things.
(24:17):
Now we'll hear next week about how the government is
going to dice up the spending pie in the spending
review between all the various government departments. Obviously Defense will
be a key part of that and one of the
what they call protected departments, as all health and presumably
education as well. But what that always stands to highlight
is the challenge for other government departments and the cuts
(24:39):
that they are real terms cuts, I should say that
they face. So the extra money to fund defense by
cutting spending elsewhere is very very limited. That really leaves
one option, and that's higher taxes, and of course that
presents numerous challenges, not least that the Chancellor has said
that she doesn't want to raise taxes again. But there
(24:59):
are multip tude of risks that are sort of materializing.
Defense is one, but there are others that suggest that
come October, when the next budget is due, or in
the autumn, I should say that the government is going
to have to think about potentially raising taxes again.
Speaker 4 (25:13):
As I say, it's not.
Speaker 2 (25:15):
Just about defense, but defense is one of the big
fiscal risks out there, and you know, to maintain the
confidence of markets, the government is going to have to
pay for this, and as I say, I think it's
going to be through higher taxation domestically.
Speaker 8 (25:27):
That is reflected in think tanks like the Institute for
Fiscal Studies saying something quite similar. Chunky taxizes was how
they put it down. Thank you so much for being
with me and for your analysis. Bloomberg's chief UK economist
Dan Hanson, thank you so much. Ellen. I want to
end with some thoughts from you. Though Britain needs to
keep up, wants to ramp up, wants to rearm How
(25:50):
quickly is this really going to happen? And I'd love
you to layer into that some of your thoughts from
your interactions with the defense in and with government that
you do on such a regular basis. How much of
a shift in attitude is this. I'm not sure voters
have that feeling yet.
Speaker 10 (26:11):
It's really interesting when you look at the polling. The
British public actually really quite in favor of increased defense spending,
increased focus on what's described as like the insurance for
the UK, for the UK homeland. And yet when you
ask them, do you want there to be taxirizers to
pay for this? Do you want cuts in public services
to be able to fund an increase to defense spending,
(26:32):
It's a resounding no. And that's the tricky political environment
that Kirstarma and Rachel Resa are facing. This new defense
strategy is a ten year plan, so a lot of
the new procurement, the new factories that have been promised,
even the increase to the army size, we will not
see till the late twenty thirties. And yet the review
(26:55):
was very clear about the extreme threat the UK faces.
Now I was told that, you know, there has never
been a time when the UK homeland has been more vulnerable,
and that's because you know, in the Second WORLDL there
were you know, more conventional threats and yet now it's
more about threats to our critical national infrastructure, cyber threats,
threats to our deep sea cables which control almost all
(27:18):
of our data. We've seen blackouts in other parts of Europe,
We've seen a tax on the NHS. Those are the
kinds of threats that the UK is facing, as well
as the conventional warfare and the nuclear threat as well.
So there's this question there as to whether this is
just happening too late and that is the result of
decades of underinvestment, decades of a peacetime mentality. Now, what
(27:41):
the reviewers are very clear on is they want to
create an industry and a national endeavor that allows the
UK to ramp up quickly to fast forward some of
this stuff if needed. Right now, the UK does not
have the capability to do that even if it wanted to.
It doesn't have the industrial base, it doesn't have the
(28:02):
military capability, it doesn't even have the numbers and conventional
weapons in personnel. So they want to create that frame
so that if there is a threat that happens, say
earlier than that ten years, that we are able to
ramp up quickly if needed. So that's the idea behind this.
But yeah, there is this kind of real worry that's
(28:24):
because of how long, over consecutive governments, we've outsourced our capabilities.
We've relied on our allies, probably too much. We've cut
our army size, we've cut our stockpiles that there's so
much catching up to do that even despite this ambitious
new strategy, we're not going to see that implemented for
(28:46):
at least ten years.
Speaker 8 (28:47):
So the UK has ambitions to revamp defense, laid out
in the one hundred and forty four pages of the
Strategic Defense Review, but Britain's spending commitments on firm to
make Britain already will require money, painful choices in the
budget and more effective procurement from the Ministry of Defense,
(29:11):
and all of this as the temperature rises with demands
for more spending from NATO to face the unknown threats
of the future. Well, that concludes this special podcast on
UK defense. Thank you so much to all of my contributors.
(29:33):
If you like the program, don't forget to subscribe and
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Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:13):
We have reports of Russian troops and tanks crossing the
border from several.
Speaker 3 (00:18):
Locations from Crimea, occupied Crimea and to the rest of Ukraine.
Speaker 4 (00:24):
The circumstances require firm and immediate actions from US.
Speaker 5 (00:28):
I decided to conduct a special military operation.
Speaker 6 (00:32):
This is as dangerous as it gets.
Speaker 4 (00:34):
This is the most dangerous moment in Europe since the
end of the Second World War.
Speaker 2 (00:37):
The only thing that Vladimir Putin understands is power. You
show any kind of a weakness and he will basically
go after you.
Speaker 7 (00:45):
One of the presidents of a big country stood up said, well, Sarah,
if we don't pay and we're attacked by Russia, will
you protect us?
Speaker 6 (00:53):
I said no, I would not protect you.
Speaker 7 (00:55):
In fact, I would encourage them to do whatever the
hell they want.
Speaker 1 (00:58):
You gotta pay, pay your bills.
Speaker 6 (01:01):
You have nice aution and don't feel now, but you
will feel it in the future.
Speaker 7 (01:07):
You don't have the cards right now with us, you
start having right now.
Speaker 5 (01:15):
Moments like this. In our past, Britain has stood up
to be counted. It has come together and it has
demonstrated strength, and that is what the security of this
country needs now and it is what this government will deliver.
Speaker 8 (01:37):
Russia's war in Ukraine was a defining moment for Europe.
So was President Trump backing away from the US's international role.
Welcome to this special podcast on Britain's defense industry. I'm
Caroline HEPKEA. We know the threats are growing and the
world is rearming. All NATO countries increase spending on defense
(01:58):
last year, and more is coming. The UK government has
promised the largest sustained increase since the Cold War in
defense spending as part of the Strategic Defense Review. The
government wants to get the military to a position of
war fighting readiness. Here's the Prime Minister kissed Armer.
Speaker 5 (02:18):
When we are being directly threatened by states with advanced
military forces, the most effective way to deter them is
to be ready and frankly, to show them that we're
ready to deliver peace through strength.
Speaker 8 (02:35):
But the Prime Minister's target of spending three percent of
Britain's GDP on defense in the next parliament remains fluid.
NATO members are discussing an even bigger goal, and the
UK's preliminary deal to work with the EU and get
UK defense companies access to the EU's one hundred and
fifty billion euro security fund is still subject to negotiation,
(03:00):
the defense base is suddenly moving fast. On this podcast,
we'll discuss how serious Britain is about rearmament, where the
industry is ready to scale up with three of Britain's
largest defense contractors, and I'll also be joined by Bloomberg's
Ellen Milligan, who covers UK foreign policy and defense and
(03:21):
whom I've collaborated with on this story, and alongside Bloomberg's
chief UK economist Dan Hanson with his analysis about how
feasible a surgeon defense spending really is. But before that,
what are the main challenges for industry today compared to
the conflicts of the past.
Speaker 6 (03:41):
Inspired by the leadership of mister Churchill, our war factories
work day and night in a desperate effort to re
equip our part is before the impending invasion was lunched.
Speaker 2 (03:50):
We all know the story of those days.
Speaker 8 (03:52):
Wartime spending in Britain peaked in nineteen forty five at
more than half of all economic outputs. By nineteen fifty
three it was still eleven percent of GDP, but over
the decades that spending has plunged with brief peaks around
the Falklands, War, Iraq and Afghanistan. Now there are efforts
(04:14):
to revive Britain's military industrial base and to produce more
home grown weapons.
Speaker 4 (04:23):
So you're going to go into the forge area.
Speaker 7 (04:26):
It's all done at eleven hundred degree sea, so obviously
is red hot material.
Speaker 8 (04:31):
They make all sorts of shells here at the BA
Systems factory in Washington in the northeast of England, including
these one five to five millimeter shells which are just
about almost a meter long, look like a bit of
a tin can or a kind of a water bottle
that then gets filled with explosives and a propellant. BA
(04:51):
Systems is Britain's largest defense contractor. Steve Cardu has helped
develop the business.
Speaker 7 (04:58):
We are expanding our one five to five capacity by
sixty year PROLD, so that's a combination of some additional
machining lines here at Washington on the northeast and then
the brand new explosive filling and packing facility at GLASGOWYDE.
And the real focus to us really is how do
we expand our UK renition's capacity and also how do
(05:21):
we generate resilience in our industrial base and also our
supply chaw.
Speaker 8 (05:25):
How prepared are you?
Speaker 7 (05:27):
How ready I you know the preparation that we're doing
around our upscaling of of our production capability, the underpinning
of our supply chains explosed to some propellants. That is
all geared around what we anticipate the global environment's going
to need.
Speaker 8 (05:45):
As Steve kard You explains this, BAE System's factory is
working three shifts levels last scene post Iraq and Afghanistan.
They're making artillery shells for the British Army and Ukraine.
There is a growing realization, according to BAE that munitions
(06:05):
are the weapon needed in war, but BAE Systems wants
firmer spending commitments from customers. In other words, the UK's
Ministry of Defense, the mod's own report two years ago
found a seventeen billion pound equipment black hole. Alan West
(06:27):
has had a long career in the military and beyond.
He was first Sea Lord in charge of the Navy
and Royal Marines, chief of Defense Intelligence, and a government minister.
Admiral Lord West describes the poor state of the British military.
Speaker 6 (06:44):
Our cupboard is bear in terms of extra weapons, extra ammunition,
extra missiles, things like that we've cut down on training,
We've not really had enough money to really focus hard
on recruiting and on people. When you add all these
things together, the hollowing out has been catastrophe.
Speaker 8 (07:00):
Actually, how hard then, from that pretty long list and
disastrous state of affairs, as you say, a bare cupboard,
how hard do you think it's going to be to rebuild?
Speaker 6 (07:10):
It's going to be extremely difficult, And I think some
politicians and people in Whitehall are deluding themselves about how
quickly it can be done.
Speaker 8 (07:21):
Prime Minister Kirs Starmer has pledged defense spending will reach
two and a half percent of GDP by twenty twenty seven,
up from two point three percent currently, and then get
to three percent over the next decade. But Lord West
says those plans are too tentative.
Speaker 6 (07:39):
The way to do this is rather like when in
nineteen forty six seven Levin said to atle we have
got to have an atomic bomb, there's no question about it,
and the Prime Minister and the Defense Secretary and the
Foreign secretary in cabinet said, right, we're going to do that,
and they found the money, and the country was pretty broke.
They found the money and spent the mon to get
(08:00):
an atomic bomb, and that meant cutting things that were
very close to their heart like the new welfare stage
and health service and things. I'm afraid this government, if
it is taking defense seriously, has to say right, we
are going to spend this money and they need to
start doing it now.
Speaker 8 (08:17):
The urgency is reflected by Leonardo UK, part of the
Italian Global Defence Giant, which focuses on combat air projects
like the Eurofighter Typhoon, with hubs in Newcastle, Jovill and Edinburgh.
Clive Higgins is UK Chair and CEO. He told me
he recently hosted Prime Minister Starmer for a visit.
Speaker 1 (08:39):
We've needed to increase defense spending for some time. I
would say the threat vector is increased, so that's driven
that need to change. So now increasing to two point
five potentially three percent in the next parliament absolutely critical.
We've seen a lot of transformation coming through defense in
the UK in particular, so you're seeing the structures of
(09:01):
defense in government transforming.
Speaker 6 (09:03):
Now.
Speaker 1 (09:04):
They want more pace, they want more agility, the flow
of funding has to be improved. And also recognizing that
post COVID, where we recognize that supply chain resilience was
a key attribute. We need that in defense as well.
So I think the ambitions you've seen from the UK
government with announcements on significant increases of defense bending are
really positive, but that needs to translate in terms of
(09:24):
reality on the ground.
Speaker 8 (09:27):
The government has now released its Strategic Defense Review, with
the Prime Minister outlining plans to overhaul the British military,
including expanding the nuclear Deterrent, but still with scant details
about how it will be paid for. Ben Bridge's Chair
of Airbus, Defense and Aerospace UK.
Speaker 4 (09:51):
A lot of the rhetoric, if you like, is reflecting
not only the importance of defense and the needs to
invest in defense and spend more on defense, but to
do that in the U. So I think this is
the year where we and the UK defense industry will
hope to see those words turning into action.
Speaker 8 (10:07):
So you think it's a pivotal year. Then are you
doing anything to ramp up in the UK now or
are you awaiting all of those reviews and the contracts
to arrive.
Speaker 4 (10:17):
The question, I guess will be what further opportunities or
requirements will come from the government and will be ready
to ramp up as you say, and ready to increase
and invest ourselves if that were to happen.
Speaker 8 (10:30):
So airbos in the UK is poised but paused. But
Marion Mesmer, senior researcher at Chatham House, explains that other
NATO countries are not standing still.
Speaker 9 (10:42):
For a long time, the UK was one of the
leaders when it came to defense spending in natal, but
actually ever since the for scale Russian invasion in twenty
twenty two, other native member states, especially those along NATO's
eastern border with Russia, have increased defense spending much more
rapidly than the UK. So the UK, with spending around
(11:02):
two point five percent of GDP and intentions to spend
two point seven perhaps over the next several years, is
actually lagging far behind countries like Poland, which are already
spending in excess of four percent of GDP and are
also intending to spend more.
Speaker 8 (11:18):
And so as Europe and NATO ramp up, there is
also the difficult question of what Britain should be preparing
for when it comes to global threats. Marian Mesmer is
clear what may be expected from Britain.
Speaker 9 (11:32):
We know that Russia wants to continue to essentially increase
its own self image as a great power, so I
think the threat from Russia is really real, and what
we know about Russian strategic thinking is that if they
were to attack Natal, a likely line of attack would
be in the Baltic States, where the UK has a presence.
So the UK essentially needs to be ready to help
(11:55):
defend the Baltic States.
Speaker 8 (11:59):
BAE Systems, they are firing up the forges. Gavin Krimmings
from the Munitions Division tells me they're working on creating
sovereign defense supplies for the likes of explosives.
Speaker 3 (12:14):
There are times where we do scale up to kind
of three shift work in and for the last time
all the factories were kind of at Bakala. Scale was
probably paused Iraq, Afghanistan.
Speaker 8 (12:26):
The government has plans for six new munitions factories to
come soon. The ambition is now to move to a
position of war fighting readiness, but with the growing threat
of war, there are questions about whether the UK is
moving fast enough and how the country will pay for it.
(12:50):
So a visit to the BAE Systems factory there in Washington,
Tyne and we're well with me on that visit was
Bloomberg's Ellen Milligan, who covers you CA foreign policy and
defense at Bloomberg and she's with me in the studio. Ellen,
good to have you with me. Incidentally, the village where
that factory is located also is home to the ancestral
(13:14):
home of the first US President, George Washington, which I
thought felt quite significant at the time. And it's really
at the heart of kind of industrial Britain, near the
old shipbuilding yards, near the Nissan factory in Sunderland that
still churns out, you know, a huge number of vehicles.
What did you make of that visit, going to see
(13:34):
the factory, going to see those shells, It did bring
it home to us the seriousness of this moment.
Speaker 10 (13:42):
Yeah, it was amazing to see the production line because
I don't think either of us had seen that in
person before. You write so much about the shortage of
these one five to five shells that BAA is making,
and actually to go and see the production line and
the people working on that, and how they're ramping up
production and they're moving to a twenty four to seven
(14:02):
shift pattern as well for the first time since Iraq.
And this plays into the UK's new defense strategy, which
is all about creating a stronger industrial base to ramp
up production of weapons and of shells if needed, because
the UK stockbars have almost completely run dry due to
(14:23):
under investment and support that Britain has given to Ukraine
throughout the war as well. So the UK now wants
to create an always on munitions production, which actually BAE
work quicker to that than the UK government were, so
that there is a constant line of production. So twenty
four to seven these shells are being made and that
(14:45):
will enable them to massively increase their stockpiles, both for
the British Army and to give to Ukraine.
Speaker 8 (14:52):
So re arming for Britain is now the destination. Ellen.
The question is how does Britain get there.
Speaker 10 (15:00):
Unveiled this actually very ambitious strategy to get there. It
encompasses rebuilding Britain's stockpiles both of munitions and of weapons,
which have run dry due to under investment over many decades,
but also due to the support that we've been giving Ukraine.
They want to create an always on munitions production, for example,
(15:22):
that can be ramped up quickly if needed if Britain
is confronted with war. For example, they want to expand
their submarine fleet, they want to expand their nuclear deterrent.
They want to provide a small uplift to the army
even in the next decade. So really ambitious plan, but
has been met by some criticism over how they will
(15:45):
fund it. There is a debate over whether their target
to reach three percent of GDP on defense spending by
twenty thirty four, whether that's an ambition or a firm commitment.
Over the weekend, it transpired that it was a commitment,
and then just a day later it transpired it was
back to being an ambition, and Kistama was very clear
(16:06):
about that. Meanwhile, we've got NATO set to up its
target to three point five percent by potentially as soon
as twenty thirty two. So there's this gap here that
remains between the UK's rhetoric and actually how it's going
to fun this in the foam commitments behind that.
Speaker 8 (16:23):
This is also the first of the major defense moments
that the industry is thinking about for the whole of
this year. You mentioned the NATO Defense Minister's meeting, but
there are another number of steps that we're going to
see in the UK this year.
Speaker 10 (16:40):
Yeah, we've got this big NATO summit coming up where
this new target will be agreed and the UK will
undoubtedly have to sign up to that. You know, it
was very clear this week that it wanted to take
a lead in a more lethal NATO. I don't know
how you can take a lead in NATO if you're
not signed up to the new commitments. And then we've
a number of other reviews coming out on Britain's security
(17:04):
strategy and the national security threats, and those will come
out later in the year. We've got an audit on
Britain's relationship with China, which, alongside Russia, was mentioned quite
a lot in the review this week in the Strategic
Defense Review, because of their nuclear power and the ramp
up of their military that we've been seeing over the
last couple of decades. So there are a number of
(17:26):
moments coming up, and I think the UK government is
conscious that this isn't the end point, this is actually
the beginning point. They want it to be a national conversation,
a national effort and endeavor to get the UK back
on a war footing.
Speaker 8 (17:42):
Okay, well, let's broaden out the conversation, then shall we.
Bloomberg's chief UK economist, Dan Hanson is with us and
he's been analyzing these defense spending plans. Dan good to
speak to you. You've looked at the costs and it's
one thing to have an ambitious plan, it's another to
liver on it. How does Britain pay for this?
Speaker 2 (18:03):
It's a really challenging backdrop. All of these demands on
defense are coming at a time when there is very
very little physical space in the UK. If you go
back even just to March, where the Office for Budget
Responsibility put out its latest forecast, it's said there that
lifting defense spending just a three percent of GDP, which is,
(18:24):
as Ellen said, the ambition of the government. It's not
not a commitment from two and a half percent of GDP.
Just lifting it by effectively half percent of GDP would
cost seventeen billion pounds by twenty thirty or in twenty thirty.
So that's an enormous amount of money. I mean, just
to put some context around that, that's about two p
on the basic rate of income tax if you're thinking
(18:46):
about paying for that in terms of tax increases. So
it's an enormous amount of money just to move to
that three percent of GDP. And of course, as Ellen
is set out there, there calls from NATO to think
about three and a half percent center GDP. We'll find
out more about that later this month. And also, of
course there's still this five percent of GDP target that
(19:07):
Donald Trump has been speaking about. Of course, the three
and a half percent sort of fits into that, and
I think a looser definition of defense spending that NATO
are talking about. But there are these huge demands, and
as I say, it's all coming at a time when
the public finances are extremely stretched.
Speaker 8 (19:22):
And so in terms of the government's twin pledges, the
government in the UK also wants that defense spending to
grow the British economy. I wonder whether the government can
do both at the same time.
Speaker 2 (19:38):
Yeah, it's a really good question, and I think there's
a there's a real debate about whether defense spending is
this sort of like this panacea for the UK's growth challenge.
You know, we've had very anemic growth in the UK
for a long time, and the previous government and this
government really looking for ways to turbo charge the economy.
I think from where I'm sitting, it's almost certain that
(20:02):
this will give a short term boost to the economy.
So boosting defense spending will lift the economy in the
near term, and that's obviously a positive thing. The real
question is will it produce lasting benefits? So will it
lift the level of GDP permanently? And I think there
are there's a lot more uncertainty, I think it's fair
(20:22):
to say, And a lot depends on how the money
is spent. So if you focus spending very much on
domestically driven investment on research and development, the academic evidence
told you that that gives you a much better chance
of boosting the economy in the longer term as opposed
to say, spending the money on day to day spending.
(20:44):
And the government is clearly focused on that side of
the ledger. But I think you know, for us at least,
the jury's out on whether this is the sort of
the answer, the sort of one answer to Britain's growth challenge.
Speaker 1 (20:56):
Ellen.
Speaker 8 (20:57):
The UK also has a particular issue because it is
one of the few NATO members in Europe that has
a nuclear deterrent and the government is keen to renew
and to expand in some senses the nuclear deterrent, but
it takes up about half of the mod's budget. How again,
is Britain going to deliver on that kind of additional spending.
Speaker 10 (21:20):
I think this was actually the most significant strategic shift
this week in the review because it called on the
UK to expand its nuclear deterrance in NATO, and Trump
was not mentioned in this review, but clearly he was
overshadowing it because there are doubts is the US pulls
its security assurances from Europe that if a circumstance arises
(21:44):
where Europe would want the US nuclear deterrents to protect them,
whether Trump would allow that to happen. The UK and
France are the only European nations inside NATO that have
a nuclear deterrent, but France hasn't yet commit to allowing
their sovereign nuclear deterrent to cover the whole of Europe.
They are now having those discussions. They're having those discussions
(22:07):
with other European allies, so that's significant.
Speaker 8 (22:09):
But the UK is.
Speaker 10 (22:11):
The only European niche that has committed to using its
deterrence over the whole of Europe, over the continent within NATO.
So now the UK wants to look at expanding its capability.
Right now, it just has submarines that can launch nukes,
but they're looking at buying jets that can launch nukes,
(22:31):
for example, and there's other things like I think Russia
has some capability that allows them to fire nukes of trains.
I don't think the UK is quite looking at that.
But there's ways to diversify the deterrent. That is really
significant one because it shows that the UK is fearful
of the reliance of the US and so it's really expensive.
As you say, Trident takes up a huge chunk of
(22:53):
the UK's defense budget and it was really interesting to
hear actually down there talk about the seventeen billion required
to get to that three percent, because that's the exact
amount that was identified as a black hole in the
UK Zone equipment plan a couple of years ago. That's
slightly separate to the nuclear deterrent, but it shows where
those financial gaps are. The UK, for the first time
is unveiled exactly what the investment plans in tried and are.
(23:17):
They said that they will commit fifteen billion pounds to
its warhead program. I mean that's a huge amount of money.
So when you're talking about the gap between the rhetoric
and the actual funding, these are the kinds of amounts
we're talking about huge amounts there.
Speaker 8 (23:30):
So how does the government make these sums add up?
Speaker 2 (23:34):
The government has experienced this pretty challenging time, I would
say on the fiscal front in terms of you had
the budget in October where the you know, you saw
guilt yields rise quite sharply. After that, we had a
bit of a fright at the start of January, and
I think investors globally are really watching governments for how
(23:55):
they how they tackle fiscal policy and how they think
about fiscal sustainability. So my sort of starting point for
this is that it's very unlikely that the UK is
going to get away with boring all of this extra
money that it needs to fund these defense commitments. So
that leaves two options. One is reduced spending on other things.
(24:17):
Now we'll hear next week about how the government is
going to dice up the spending pie in the spending
review between all the various government departments. Obviously Defense will
be a key part of that and one of the
what they call protected departments, as all health and presumably
education as well. But what that always stands to highlight
is the challenge for other government departments and the cuts
(24:39):
that they are real terms cuts, I should say that
they face. So the extra money to fund defense by
cutting spending elsewhere is very very limited. That really leaves
one option, and that's higher taxes, and of course that
presents numerous challenges, not least that the Chancellor has said
that she doesn't want to raise taxes again. But there
(24:59):
are multip tude of risks that are sort of materializing.
Defense is one, but there are others that suggest that
come October, when the next budget is due, or in
the autumn, I should say that the government is going
to have to think about potentially raising taxes again.
Speaker 4 (25:13):
As I say, it's not.
Speaker 2 (25:15):
Just about defense, but defense is one of the big
fiscal risks out there, and you know, to maintain the
confidence of markets, the government is going to have to
pay for this, and as I say, I think it's
going to be through higher taxation domestically.
Speaker 8 (25:27):
That is reflected in think tanks like the Institute for
Fiscal Studies saying something quite similar. Chunky taxizes was how
they put it down. Thank you so much for being
with me and for your analysis. Bloomberg's chief UK economist
Dan Hanson, thank you so much. Ellen. I want to
end with some thoughts from you. Though Britain needs to
keep up, wants to ramp up, wants to rearm How
(25:50):
quickly is this really going to happen? And I'd love
you to layer into that some of your thoughts from
your interactions with the defense in and with government that
you do on such a regular basis. How much of
a shift in attitude is this. I'm not sure voters
have that feeling yet.
Speaker 10 (26:11):
It's really interesting when you look at the polling. The
British public actually really quite in favor of increased defense spending,
increased focus on what's described as like the insurance for
the UK, for the UK homeland. And yet when you
ask them, do you want there to be taxirizers to
pay for this? Do you want cuts in public services
to be able to fund an increase to defense spending,
(26:32):
It's a resounding no. And that's the tricky political environment
that Kirstarma and Rachel Resa are facing. This new defense
strategy is a ten year plan, so a lot of
the new procurement, the new factories that have been promised,
even the increase to the army size, we will not
see till the late twenty thirties. And yet the review
(26:55):
was very clear about the extreme threat the UK faces.
Now I was told that, you know, there has never
been a time when the UK homeland has been more vulnerable,
and that's because you know, in the Second WORLDL there
were you know, more conventional threats and yet now it's
more about threats to our critical national infrastructure, cyber threats,
threats to our deep sea cables which control almost all
(27:18):
of our data. We've seen blackouts in other parts of Europe,
We've seen a tax on the NHS. Those are the
kinds of threats that the UK is facing, as well
as the conventional warfare and the nuclear threat as well.
So there's this question there as to whether this is
just happening too late and that is the result of
decades of underinvestment, decades of a peacetime mentality. Now, what
(27:41):
the reviewers are very clear on is they want to
create an industry and a national endeavor that allows the
UK to ramp up quickly to fast forward some of
this stuff if needed. Right now, the UK does not
have the capability to do that even if it wanted to.
It doesn't have the industrial base, it doesn't have the
(28:02):
military capability, it doesn't even have the numbers and conventional
weapons in personnel. So they want to create that frame
so that if there is a threat that happens, say
earlier than that ten years, that we are able to
ramp up quickly if needed. So that's the idea behind this.
But yeah, there is this kind of real worry that's
(28:24):
because of how long, over consecutive governments, we've outsourced our capabilities.
We've relied on our allies, probably too much. We've cut
our army size, we've cut our stockpiles that there's so
much catching up to do that even despite this ambitious
new strategy, we're not going to see that implemented for
(28:46):
at least ten years.
Speaker 8 (28:47):
So the UK has ambitions to revamp defense, laid out
in the one hundred and forty four pages of the
Strategic Defense Review, but Britain's spending commitments on firm to
make Britain already will require money, painful choices in the
budget and more effective procurement from the Ministry of Defense,
(29:11):
and all of this as the temperature rises with demands
for more spending from NATO to face the unknown threats
of the future. Well, that concludes this special podcast on
UK defense. Thank you so much to all of my contributors.
(29:33):
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