How decades of higher welfare spending left Europe at the mercy of Putin

When Jeremy Hunt delivered what might be his final Budget ahead of the election, he mentioned taxes 52 times, the NHS 23 times and migration four times.

But observers were quick to point out the elephant in the room. Despite a seemingly ever-growing threat from Russia, the Chancellor mentioned defence only once in Wednesday’s speech – and offered no new money for the creaking armed forces.

Only a day after Hunt’s omission came a scathing report by MPs warning of a £29bn financial black hole in defence spending, criticising the lack of a “credible” plan that has left Britain’s security increasingly reliant on allies.

The funding shortfall is more than three times the size of the wafer-thin £8.9bn financial buffer Hunt has left himself in his fiscal plans over the next five years.

It comes as security experts warn of a “dangerous decade” of instability, with Russia’s war in Ukraine entering its third year.

Vladimir Putin is ramping up military production and Western leaders increasingly fear he will test Nato’s resolve that an attack on one member is an attack on all.

Unfortunately, the UK’s underfunded defence services are not an outlier. Instead, they are replicated in every other large European economy.

For years, defence spending stagnated while welfare costs surged. Now, bloated with Covid debt, feeling the pressures of ageing populations and confronted with voters furious over deteriorating public services, there is a big question mark over whether the Continent can change course.

“It is going to be tough,” says Marcel Schlepper at the Ifo Center for Public Finance and Political Economy in Munich.

The 32 Nato allies are expected to spend at least 2pc of GDP on defence. Some 18 countries will meet this threshold in 2024, the alliance has said. It marks an increase from 11 the year before.

“Even more than two years after the war in Ukraine has started, not all pay as much as they are supposed to and as they have agreed within their military alliance. So I think this is a very strong sign that they do not do enough,” Schlepper says.

Nato is yet to reveal which countries this includes, but the three largest European economies – Germany, the UK and France – will hit the target. The fourth-largest, Italy, is still woefully short after spending only 1.46pc of  GDP last year and warning the share could fall further.

Yet many experts argue that there is a strong case for raising spending on defence beyond the 2pc benchmark.

The British Government has already said it wants to get to 2.5pc, although even this commitment – still well below the 4pc reached during the Cold War – was couched in vague language by Hunt, who said it would happen when “economic conditions allow”.

In Germany, the defence minister has said that 2pc “can only be the starting point”.

The world is becoming a more dangerous and conflict-ridden place after decades of improving stability. In the Middle East, attempts to bring the Israel-Hamas war to a halt have so far proved futile and risks of a wider conflict remain high.

Further east, China is ramping up military spending by 7.2pc this year amid a hardening stance on Taiwan and rising tensions with the US and its neighbours.

Meanwhile, the focus of the US is drifting away from Ukraine and towards Asia, experts say. An election that could return Donald Trump to power nears in November.

The erratic former president has already threatened to take the US out of Nato and said he would “encourage” Putin to attack any member of the alliance failing to spend enough on defence.

“That is really making people in Europe think that a year from now Nato defences could be primarily European-led rather than working on the assumption the Americans will always be there when we need them. That is a big change,” says Malcolm Chalmers, the deputy director general at the Royal United Services Institute in London.

“The Americans are in danger of overstretch and that is one of the reasons why they desperately want their allies in Europe to step up. The American military has made difficult commitments especially in East Asia but also in the Middle East.”

There are three main ways of raising more money for defence on a permanent basis, says Schlepper. The first to increase taxes at a time when many European countries are already struggling to recover, a “very risky bet”.

The second is to borrow more, but tight fiscal rules and high post-pandemic debt levels mean this is not an option for many countries. Markets will punish overextended countries seen as irresponsible as Liz Truss discovered after her disastrous mini-Budget, Schlepper warns.

“Then the only solution is household consolidation,” Schlepper says – economics jargon for taking the money from somewhere else like hospitals, the police or plans to fill potholes.

The challenges Europe’s largest economies already face underline how difficult this will be.

The same day Hunt delivered his “slimmed down” Budget, France’s finance minister Bruno Le Maire warned that his country’s already large deficit was even worse than expected.  

As a result, France will cut spending by at least £10bn in the 2025 budget after painfully trimming £8.5bn of fat this year.

The situation is not much better in Germany, where public finances were plunged in chaos at the end of last year after a court ruling declared its budget illegal for breaching a law against taking on new debt.

In the biggest crisis of Scholz’s two years in power, the government had to make wildly unpopular spending cuts and tax rises to fill a £51bn hole in its finances.

In the UK, calls for greater defence spending have only grown louder in recent years as MPs have become increasingly concerned about the UK’s ability to effectively project power.

Though one of two new UK aircraft carriers HMS Prince of Wales has been leading a Nato training exercise in Norway in recent weeks, the Royal Navy was forced to rely on allied nations for support ships to form what is known as a full carrier strike group.

Critics argue this weakness was also underlined by the decision to deploy only one destroyer, HMS Diamond, to the Red Sea to deter Houthi attacks rather than one of the carriers.

Other capability gaps have also been glaring at times.

Lead carrier HMS Queen Elizabeth took 10 American F-35 stealth jets on her flight deck to bolster the eight that could be mustered by the Royal Navy in her maiden voyage around the Indo-Pacific in 2021.

And it isn’t just the Navy. Last month, MPs on the defence committee warned that “all three services have growing capability shortfalls”, partly owing to failures to recruit enough personnel.

Their inquiry identified a series of issues, including a lack of infantry fighting vehicles for the Army following the retirement of the Warrior, the shrinking of the fleet of Challenger tanks as they are upgraded, delays to the delivery of Ajax armoured fighting vehicles and a “lack of air transport capability” needed to deploy special forces in the ways required.

On top of this, donations to Ukraine of 155mm shells, AS-90 self-propelled howitzers and thousands of NLAW shoulder-mounted missile launchers have left the UK’s own stockpiles depleted, with MPs sceptical that they are being replaced quickly enough.

“We recommend that either a budget uplift or a strictly adhered to prioritisation ranking is introduced,” they said.

David Lockwood, chief executive of UK defence contractor Babcock, last month told journalists the current global market was “very supportive because there’s a real need for military capability”.

“But budgets are still tight even if they’re increasing,” he added.

“They’re not increasing at the demand that militaries have.”

Spending more on defence would come with tough trade-offs for the British public, says Ben Zaranko from the Institute for Fiscal Studies.

Increasing spending from 2pc to 2.5pc of GDP would require finding an extra £16bn a year.

Hunt has already pencilled in what economists say are “implausibly” tight spending plans for the years after the election. While defence, healthcare and education are among departments with “protected” budgets, unprotected areas such as the over-clogged courts system and strained local governments face £19bn of cuts in real terms.

“If they do decide to stick to these overall spending totals and spend a hell of a lot more on defence, I think that has to come with a recognition that we as a country can’t afford to do all of the other things we’d like to do,” Zaranko says.

“The Government is going to have to think about starting to means-test something that is currently universally provided, chop off arms of the welfare state, start charging for things like some NHS services or maybe charging people loans for sixth form education.”  

In fact, it is declining defence spending over the past many decades – alongside falling interest rates and in the UK lower public investment – that have allowed for spending to rise on welfare and more comprehensive health systems.

Schlepper’s team examined changes in financial policy since 1990 in European Nato countries, and found that social spending is now 2.1 times higher than it used to be. However, their economies have only grown by around 1.6 times and defence spending remains at the level it used to be in 1990 when accounting for inflation.

“We see that social spending has been increasing and it is also by far the largest share within government budgets at the moment,” Schlepper says.

“So if we do not find an answer to how we can stop this increase of social spending, it is going to be very difficult to find an answer to how we can achieve permanently higher defence spending.”

The solution, he believes, is to implement growth-focused policies and refrain from committing to more spending on public services for a few years.

“We are living now in a more dangerous Europe, which we are not prepared for. If the citizens think there is a security threat and the government should invest more in defence, then I think that is something very possible to do and we’ve seen this in Eastern Europe,” Schlepper says.

Politicians may find the trade-offs are a tough sell to voters – which perhaps explains why Hunt was so willing to overlook the elephant in front of him when he was standing at the dispatch box.