Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:07):
Hello. I'm Caroline Hepka, one of the hosts of the
UK Politics podcast, and this week I wanted to bring
you something quite different. It's been generations since anyone has
had to seriously think about defending the nation. That might
be changing and I've spent the past month looking into
Britain's defense industry. Here is a special podcast that we've
(00:27):
made looking at how the UK's military power might be rebuilt.
Speaker 3 (00:39):
We have reports of Russian troops and tanks crossing the
border from several locations from Crimea, occupied Crimea and to
the rest of Ukraine.
Speaker 4 (00:50):
In circumstances require firm and immediate.
Speaker 5 (00:52):
Actions from US, I decided to conduct a special military operation.
Speaker 6 (00:57):
This is as dangerous as it gets.
Speaker 7 (00:59):
This is most dangerous moment in Europe since the end
of the Second World War.
Speaker 4 (01:03):
The only thing that Vladimir Putin understands is power. You
show any kind of a weakness and he will basically
go after you.
Speaker 3 (01:11):
One of the presidents of a big country stood up said, well, sir,
if we don't pay and we're attacked by Russia, will
you protect US?
Speaker 4 (01:19):
I said no, I would not protect you.
Speaker 8 (01:21):
In fact, I would encourage them to do whatever the
hell they want.
Speaker 4 (01:24):
You got to pay, you gotta pay your bills.
Speaker 3 (01:27):
You have nice ocean and don't feel now, but you
will feel it in the fusion. You don't have the
cards right now with us, you start having right.
Speaker 5 (01:37):
Now 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 2 (02:02):
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 Hepke. We know the threats are growing and the
world is rearming. All NATO country's increase spending on defense
(02:23):
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 Kirs Starmer.
Speaker 5 (02:44):
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 stre.
Speaker 2 (03:01):
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 defence companies access to the EU's one hundred and
fifty billion euro security fund is still subject to negotiation.
(03:26):
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
(03:46):
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 3 (04:06):
Inspired by the leadership of mister Churchill. Our war factories
work day and night in a desperate effort to re
equip our force. Is before the impending invasion was lunched.
We all know the story of those days.
Speaker 2 (04:18):
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
(04:39):
to revive Britain's military industrial base and to produce more
home grown weapons.
Speaker 9 (04:48):
So we're going to go into the forge area.
Speaker 7 (04:52):
It's all done at eleven under degree. See, so what
you see is red hot material.
Speaker 2 (04:57):
They make all sorts of shells here at the bac
Eton's 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.
It then gets filled with explosives and a propellant. BA
(05:17):
Systems is Britain's largest defense contractor. Steve Cardu has helped
develop the business.
Speaker 9 (05:24):
We are expanding our one five to five capacity by
sixty proll so that's a combination of some additional machining
lines here at Washington in the Northeast and then the
brand new explosive filling and packing facility at Glasgowyde.
Speaker 8 (05:39):
And the real focus for us really is how do.
Speaker 9 (05:41):
We expand our UK redition's capacity and also how do
we generate resilience in our industrial base and also our
supply shew.
Speaker 2 (05:51):
How prepared are you? How ready are I?
Speaker 9 (05:54):
You know, the preparation that we're doing around our upscaling
of of our production capability, the under pinning of our
supply shame with exposures and repellents, that is all geared
around what we anticipate the global viarment's going to need.
Speaker 2 (06:10):
As Steve Kardu explains this, BAE System's factory is working
three shifts levels last seen 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 are
(06:32):
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 has
(06:53):
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 (07:09):
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 catastrophic.
Speaker 2 (07:25):
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 (07:36):
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 2 (07:47):
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 (08:04):
The way to do this is rather like when in
nineteen forty six seven Levin said to Atlee, 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 money to get
(08:26):
an atomic bomb, and that meant cutting things that were
very close to their heart, like the new welfare state
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 2 (08:42):
The urgency is reflected by Leonardo UK, part of the
Italian Global Defense Giant, which focuses on combat air projects
like the Eurofighter Typhoon, with hubs in Newcastle, Joville and Edinburgh.
Clive Higgins is UK chair and CEO. He told me
he recently hosted Prime Minister Starma for a visit.
Speaker 8 (09:05):
We've needed to increased 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
(09:27):
defense in government transforming. Now 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
(09:47):
of defense spending are really positive, but that needs to
translate in terms of reality on the ground.
Speaker 2 (09:53):
The government has now released its Strategic Defense Review, with
the Prime Minister outlining plans to own 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 Air Boss Defense and Aerospace UK.
Speaker 10 (10:17):
A lot of the rhetoric, if you like, is reflecting
not only the importance of defense in the need to
invest in defense and spend more on defense, but to
do that in the UK. So I think this is
the year where we and the UK defense industry will
hope to see those words turning into action.
Speaker 2 (10:33):
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 7 (10:42):
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 2 (10:55):
So Air Boss in the UK is poised but paused.
But Marian Messmer, senior researcher at Chatham House, explains that
other NATO countries are not standing still.
Speaker 11 (11:07):
For a long time, the UK was one of the
leaders when it came to defense spending in NATO, 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
(11:28):
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 2 (11:44):
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 11 (11:58):
We know that Russia wants to contin you 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
(12:20):
to help defend the Baltic States.
Speaker 2 (12:25):
Back at 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 12 (12:39):
There are times where we do scale or have to
kind of three shift work in but the last time
all the factories were kind of at that kind of
scale was probably caused Iraqi, Afghanistan.
Speaker 2 (12:51):
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.
(13:16):
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 UK 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
(13:40):
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
(14:00):
the factory, going to see those shells. It did bring
it home to us the seriousness of this moment.
Speaker 1 (14:08):
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
(14:28):
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 stock parts have almost completely run dry due
(14:48):
to 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 munition's production which actually
actually BAE work quicker to that than the UK government were,
so that there is a constant line of production. So
twenty four seven these shells are being made, and that
(15:11):
will enable them to massively increase their stockpiles, both for
the British Army and to give to Ukraine.
Speaker 2 (15:18):
So re arming for Britain is now the destination.
Speaker 8 (15:22):
Ellen.
Speaker 2 (15:22):
The question is how does Britain get there?
Speaker 1 (15:25):
Well, they've 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,
(15:48):
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 to 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
(16:10):
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 Kirstama was very clear
(16:31):
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 fund this in the firm commitments behind that.
Speaker 2 (16:49):
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 Ministers meet, but
there are another number of steps that we're going to
see in the UK this year.
Speaker 1 (17:06):
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
got a number of other reviews coming out on Britain's
(17:29):
security 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
(17:52):
of moments coming up, and I think the UK government
is conscious that this isn't the end point, this is
actually the beginning point. Want it to be a national conversation,
a national effort and endeavor to get the UK back
on a war footing.
Speaker 2 (18:08):
Okay, well, let's broaden out of 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
deliver on it. How does Britain pay for this?
Speaker 4 (18:28):
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,
(18:49):
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
costs eighteen 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
(19:12):
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 of 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
(19:33):
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 2 (19:48):
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 4 (20:04):
Yeah, it's a really good question, and I think there's
a real debate about whether defense spending is this sort
of if you 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 turbocharge the economy. I
(20:24):
think from where I'm sitting, it's almost certain that 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 there are
(20:46):
there's a lot more uncertainty, I think it's fair 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
(21:08):
the money on day to day spending. 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 2 (21:22):
Ellen. The UK also has a particular issue because it's
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
(21:44):
additional spending.
Speaker 1 (21:45):
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 deterrence in NATO, and Trump
was not mentioned in this review, but clearly he was
overshadowing it because there are doubts is the US polls
its security assurances from Europe that if a circumstance arises
(22:10):
where Europe would want the US nuclear deterrants 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 committed to allowing
their sovereign nuclear deterrent to cover the whole of Europe.
They are now having those discussions. They're having those discussions
(22:32):
with other European allies. So that's significant. But the UK
is the only European nation 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
(22:55):
can launch nukes, 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
to its really expensive. As you say, triedent takes up
(23:17):
a huge chunk of 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,
(23:37):
for the first time is unveiled exactly what the investment
plans in trident are. 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 2 (23:56):
So then how does the government make these sums add up?
Speaker 4 (24:00):
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
(24:21):
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 leads to
two options. One is reduced spending on other things, now
(24:43):
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 the highlight is
the challenge for other government departments and the cuts that
(25:04):
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 are a multitude
(25:25):
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. As I say, it's
not 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
(25:48):
to pay for this and as I say, I think
is going to be through higher taxation domestically.
Speaker 2 (25:52):
That is reflected in think tanks like the Institute for
Fiscal Studies saying something quite similar chunky taxies 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
(26:16):
quickly is this really going to happen? And I'd love
you to layer into some of your thoughts from your
interactions with the defense industry 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.
Speaker 4 (26:35):
Yet.
Speaker 1 (26:36):
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 increased to defense spending.
(26:58):
It's a resounding note. It's the tricky political environment that
Kairs Armer 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
(27:21):
was very clear about the extreme threat the UK faces now.
I mean I was told that you know, there is
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
(27:42):
which control almost all 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 and that
is the result of decades of under investment, decades of
(28:04):
a peacetime mentality. Now, what 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,
(28:26):
it doesn't have the military capability, it doesn't even have
the numbers in 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
(28:47):
kind of real worry. That's because of how long, over
consecutive governments, we've outsourced our capabilities. We've relied on 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
(29:10):
to see that implemented for at least ten years.
Speaker 2 (29:13):
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 aren't firm. To
make Britain already will require money, painful choices in the
budget and more effective procurement from the Ministry of Defense.
(29:37):
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.
(29:59):
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