Escaping the subsidy trap

Why arms exports are bad for Britain

There are few if any economic or employment benefits from the considerable government support to armsexports. This report, published by three leading UK security policy think tanks, explodes the myth that arms exports are of particular value to the British economy and therefore deserving of unique support from government. It concludes that government subsidies to arms exporters, worth at least £453m and possibly up to £936m a year, are based upon false economics. Far from providing jobs, government support for arms exports diverts investment away from more effective job-creating economic activity. The only significant impact from reducing these exports would be felt by a handful of highly-dependent local economies that would need short-term, targeted government assistance to cope with the transition to civil production. On the other hand, excessive government spending on defence research and development (R&D) attracts too many skilled workers away from the civil sector, thereby exacerbating a shortage in the non-military economy and harming prospects for long-term economic growth.

Exports are not an automatic 'good': unless they achieve an adequate rate of return they are in fact a drain on the economy. Given the level of subsidy involved and the relatively low profit margins achieved in a competitive global market it is highly unlikely that arms exports either significantly offset domestic procurement costs or make a positive contribution to Britain's overall economic well-being. In any case, arms exports make up only 1.5 percent of the UK's overall exports, and any reduction in sales is likely to be partially offset by higher civil exports.

It has been highlighted by recent experience that the desire to promote exports can also have a deleterious influence upon domestic procurement decisions, thereby weakening value for money and potentially impairing the operational effectiveness of the UK's armed forces.

The recent export of BAE Hawk trainer jets to India and the related decision by the Defence Secretary, Geoff Hoon, to buy Hawk in the face of reported opposition from his own Permanent Secretary and other government departments, clearly demonstrates the erroneous assumptions driving current policy. Internal government estimates reported in the press indicate that export and employment considerations actually added, rather than saved, £1bn to the price tag for the Hawk procurement over the lifetime of the project.

UK Government support for defence exports is made up of direct subsidies, export credits, distortion of Ministry of Defence (MoD) procurement and a proportion of government spend on development costs. Explicit financial (and political) support of £31m per year is provided through such organisations as the Defence Export Services Organisation (DESO) within MoD. Export credits are provided as insurance to exporters and purchasers of UK equipment at premium rates well below the market rate, an annual subsidy that amounts to £222m. The cost of the distortion of MoD procurement to accommodate export promotion is more difficult to estimate, but if the experience of the Hawk deal is in any way indicative, our estimate of £200m is extremely conservative.

We estimate that the subsidies provided to UK companies involved in defence exports are therefore worth at least £453m and possibly up to £936m; in other words, between £7,000 and £14,400 for each job supported by exports. At a time when public spending is under pressurethe onus is on the Government to withdraw the subsidies and encourage similar withdrawals in other countries.