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Last Updated:  Thursday, 3 April, 2003, 18:08 GMT 19:08 UK
Brown's Budget and the war

Analysis
By Evan Davis
BBC economics editor

It's been a long time since we had a Budget while the nation is in a full war footing.

British soldiers in Southern Iraq
The chancellor has set aside 3bn to pay for the war
Indeed, I think 1945 was the last one. Not surprisingly, therefore, the war will probably steal the headlines on Budget day - and indeed quite possibly steal some of Gordon Brown's thunder.

But to what extent will the war upset the chancellor's calculations, and affect the measures he adopts?

The first and most obvious manifestation of the war is the cost of fighting.

Costly bullets

It's not negligible. A cruise missile costs a million dollars.

Keeping a Tornado in the air for an hour, runs up a bill of 25,000.

No wonder Gordon Brown has already allocated a total of 3bn to the war effort - to be met from his reserve for unforeseen contingencies.

Yet, that 3bn is expected to finance something over a four week war.

Graph showing the cost of US wars

Topping up the war fund

But what it does not allow for is a more protracted conflict.

Nor will it cover any significant bills for occupation or reconstruction. (Only one percent of the Ministry of Defence's total is earmarked for humanitarian assistance, although the Department for International Development has been given a couple of hundred million pounds for Iraq's reconstruction).

Contributing to maintain an army at a distance causes the people to be impoverished
Sun Tzu

Ultimately, more money will probably have to be found.

As it happens, the Budget is unlikely to be the place to announce extra cash.

The chancellor is said to be keen to avoid a "daily commentary" on the cost of the war; and would prefer to make sporadic announcements, once every few weeks. We will probably have to wait a while before the top-up to the war fund.

The chancellor's headache

HMS Splendid firing an armed Cruise Missile
HMS Splendid fires 650,000 of taxpayers' money

Even if the chancellor does not announce extra cash, can he use the cost of war as an excuse for bad news on taxes, spending and borrowing?

Probably not. The war is just not expensive enough for that.

After all, it costs over a billion pounds a week to run the NHS - the war would only pay for a few weeks of health.

Anyway, the war is a one-off cost, and can thus be paid over a long period.

But there are ways in which the war might be giving the chancellor a headache.

UK defence spending (% of GDP)
1984/85: 5.2%
1988/89: 4.0%
1992/93: 3.7%
1996/97: 2.8%
2000/01: 2.6%
First, it might be that we are entering a new, more insecure global era and it might be that we will have to spend more on defence as a result.

That would be an on-going cost, and a significant one.

As the table shows, for example, at the end of the cold war in 1988/89, we spent 4% of our national income on defence; today it is more like 2.5%.

The difference is about 15bn a year in today's money, and that one might call "end-of-cold-war peace dividend".

Even giving back a third of that would be an enormous burden for the chancellor.

Little confidence = poor revenues

UK Tornado aircraft flying over Iraq
It costs 25,000 to keep a Tornado fighter aircraft flying - weapons pay load not included

Second, the chancellor might choose to blame the war for the slowdown in the economy generally.

He could say that the knock to consumer and business confidence is suppressing spending and growth, and is thus indirectly upsetting his budget calculations.

Few would challenge him in this assertion - but it would be not right to let the war shield too much of the blame for economic gloom.

Looking back at previous conflicts - notably the Falklands and the last Gulf war - there was only a small and short-lived upward blip in savings.

The general ups and downs of the economy swamp the impact of war when it comes to spending.


War is not the real Budget problem

What appears to be happening now is that a long-awaited slowdown in consumer spending seems to be occurring, with the war acting as a catalyst rather than a cause.

The chancellor will certainly have to downgrade his economic forecasts for this year and probably next, but we knew war was a likely outcome before he made those forecasts in the Pre-Budget Report last year.

And the progress of the war has not differed sufficiently markedly to explain the growth shortfall.

All in all, therefore, the war is not yet an excuse for things going off course.

The hangover from the stock market and housing bubbles of 1999 to 2002 are the real problem.

One of the chancellor's great dilemmas is the degree to which he should blame the war for his problems - and the degree to which he can thus characterise them as short term blips that will evaporate as soon as the hostilities cease.





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