War 'small threat' to UK budget

Mr Brown's pockets are deep enough for a war

By the BBC's Steve Coulter

Speculation has abounded that military action by the UK against the Taliban could upset the UK government's spending plans.

Testing times demand more discipline, not less

Chancellor Gordon Brown

But while an open-ended campaign could eventually put a strain on the defence budget, it is unlikely to empty the Treasury's bulging coffers.

The Chancellor, Gordon Brown, has already warned his Cabinet colleagues that they need to keep an extra-tight rein on departmental budgets.

He also hinted to the Labour conference that taxes might have to rise.

Mr Brown said: "Testing times demand more discipline, not less."

Expensive business

There is no doubt that modern warfare is an expensive business.

The Gulf War cost the UK £2.5bn, according to the Ministry of Defence, although this was offset by almost £2bn of contributions from other countries which benefited from the war.

Despite a number of adverse developments, the public finances remain strong. There is no pressure on the Chancellor to raise taxes

David Walton, Goldman Sachs

Even the "limited" air campaign and peacekeeping effort in Bosnia in 1995 set the UK taxpayer back £1.2bn.

But according to the economic consultancy firm, Capital Economics, while these numbers seem large, they represent quite a small portion of overall government spending.

Even the re-conquest and garrisoning of the Falklands at a total cost of £2bn was equivalent to just 0.3% of gross domestic product (GDP), or 0.6% of total government spending.

The net cost of the Gulf War was even lower.

They also do not take into account the lucrative contracts to rebuild Kuwait, the Falklands and the former Yugoslavia, many of which went to British firms. For instance, the Kosovo Taskforce has secured contracts worth more than £24m for UK firms in Kosovo since it was set up in May 1999.

Brown's problem

The difficulty for Mr Brown is that the bulk of his emergency cash reserves of £2.7bn have already been used up by the Foot and Mouth crisis.

Soldiers complain of being under-resourced

In the longer term the global economic slowdown will shrink tax revenues and push up spending, putting further pressure on the government's finances.

Meanwhile, the collapse of Railtrack has raised questions about the future cost of financing public/private partnerships.

The City bank Goldman Sachs is cautioning that, for the first time since Labour took power, government spending is rising faster than tax receipts.

With an expensive war against terrorism now in the offing, the bank is predicting that public sector net borrowing will fall from a surplus of £20.4bn in 2000/01 to a deficit of £6.6bn in 2002/03.

Still strong

However, this is still low compared with the mid 1990's. Goldman Sachs' co-director of economics research, David Walton says: "Despite a number of adverse developments, the public finances remain strong. There is no pressure on the Chancellor to raise taxes."

Mr Blair promises more intervention

To secure his reputation for prudence, Mr Brown has enacted fiscal rules that require him to balance the government's books over the course of the economic cycle, and mean he can only borrow to invest.

In practice, these rules are looser than they seem. For instance, a lot of military spending could be described as investment, while the economic cycle is whatever Mr Brown says it is.

While it is true that lower economic growth will eat into government cash reserves, Mr Brown has built quite a large safety margin into his plans, and it would take a very expensive war to throw this into doubt.

"Even a campaign costing £1bn-£2bn a year would only represent about 0.5% of government spending", said Jonathan Loynes, chief UK economist at Capital Economics.

Military resurgence

One effect of war may be to reverse the steep falls in military spending that have taken place since the fall of communism.

Defence spending as a percentage of GDP has halved from just over 5% of GDP in 1984, to 2.5% of GDP this year, and the decline is forecast to continue.

More military spending could be bad news for the NHS

This is equivalent to £25bn a year in today's prices.

Defence chiefs have complained that soldiers' rifles and radios don't work, and that warships have been unable to leave port because they don't have any fuel.

This suggests that the armed forces are already somewhat under-funded, given their size and range of commitments.

Policy issues

The outlook for defence spending will depend on whether the war is high or low intensity, and whether the government decides to change defence priorities.

Tony Blair's Labour conference speech seemed to herald a new era of ethical intervention by already stretched British forces.

This would seem to imply that defence spending will have to be increased at some point.

Any real-terms increase in military spending might put pressure on other departmental budgets, notably Labour's priority areas of health and education. This could entail politically difficult tax rises.

The new spending plans unveiled in the July 2000 spending review included the first real terms spending increase in over a decade - albeit a miniscule 0.3% over three years.