The Subsidy Trap

British Government financial support for arms exports and the defence industry

There has been a long running debate between those who believe that arms exports are essential to a thriving British defence industry, and those who judge them a drain on the exchequer and the economy. Every significant government policy, if it is to present value for money, requires extensive analysis of its costs and benefits for society. An informed scrutiny of government subsidies for arms exports and the defence industry is long overdue. Because of the complexity of the economic relationships involved, debate has often in the past been informed more by expressions of faith than clear analysis of the facts. The purpose of this report is to review the economic, military and industrial rationale for government support for arms exports and the UK defence industry, and challenge the misuse of public resources. Saferworld and the Oxford Research Group publish this paper as a consultative document and will welcome information, analysis and responses from interested parties.

Consecutive governments have continued to argue that arms exports benefit the economy and support jobs, and that a successful home-grown defence industry is essential both for the security of Britain, and our standing in the world. The claim is also made that this industrial base ensures that we have ready and guaranteed access to the ever more sophisticated technology necessary to kit out our armed forces and the spare parts to keep it functioning and that we have the design teams, skilled labour, knowledge base and production lines to maintain a capability for the future. However, these arguments have not been backed up with clear economic evidence.

We calculate identifiable subsidies to UK arms exports to be around £420 million per annum. In addition, arms exports benefit from government military research and development (R&D), an additional subsidy of up to £570 million per annum. The cost of supporting both exports and the broader defence industrial base could amount to over £4 billion pounds per annum (this includes subsidies to arms exports and R&D), yet there is little evidence that the 1997-2001 Labour Government or previous Conservative governments ever undertook a comprehensive review of this support.

Direct government subsidies for arms exports involve several government departments. The report identifies four main categories of direct and measurable government subsidies:

- Export Credit Guarantees (£227 million)
- Marketing and other support through government agencies (£69 million)
- Tax breaks on bribes and other corrupt practices (£64 million)
- Distortion of MoD purchasing and other priorities (£60 million)