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April 1, 2020updated 02 Apr 2020 10:47am

Covid-19 Impact Scenarios on the United Kingdom Defence Budget Forecast

With the UK in the relatively early stages of the Covid-19 pandemic, a substantial level of uncertainty surrounds the country’s defense budget in the coming years.

By GlobalData

With the UK in the relatively early stages of the Covid-19 pandemic, a substantial level of uncertainty surrounds the country’s defense budget in the coming years. Budget predictions are frequently based on GDP projections and government statistics on spending, the updates of which only precipitate further into a crisis such as Covid-19. Subsequently, it is challenging to provide one single forecast for the forthcoming fiscal years. The impact of Covid-19 is largely dependent on the duration of its spread, particularly whether its effects can be mitigated earlier or later. To address these difficulties GlobalData has produced three scenarios for the UK defense budget up until Fiscal Year (FY) 2024: Pre-Covid-19 scenario, GDP Percentage Status Quo scenario, and Austerity scenario.

Pre-Covid-19 scenario

The best outcome for the UK’s defense budget in the wake of the coronavirus crisis would see a continued budget increase following the growth in actual terms forecasted prior to the pandemic. This forecast would align with a scenario where the UK’s GDP is largely unaffected by Covid-19, but this is not a necessary requirement as the government may decide to maintain pre-Covid 19 levels of spend regardless. The UK is committed to devote close to 2% of its GDP to defense (1.87% in FY 2020 according to GlobalData), which would therefore ensure a steady defense budget growth over the forecast period. This scenario is unlikely as the Covid-19 pandemic is almost certain to negatively impact the UK economy for more than the short-term period this model would require.

GDP Percentage Status Quo Scenario

The status quo forecast is arguably the most likely in the case of the UK in the medium term. This scenario shows a GDP growth slowdown starting in FY2020 due to the Covid-19 pandemic, but with the UK maintaining the percentage of GDP committed to defense prior to the crisis. There are many reasons why this may occur, but the main ones regard the current levels of committed spend in the equipment pipeline as well as the general importance of the UK defense industry in supporting the wider economy. The UK is heavily invested in numerous long-term procurement projects; many of which will not be cut due to contractual obligations and the need for the military capabilities that they will provide. The Dreadnought-class submarine, key to the UK deterrence strategy, exemplifies this: the UK will spend $1.3 billion on the project in FY2020 alone, and this commitment is certain to be sheltered over the forecast period.

Austerity scenario

Involved in many operations abroad, the UK will need to continue to maintain a substantial level of defense funding even within an austerity scenario. The UK remains keen to meet Nato’s target of spending 2% of GDP on defense, and whilst this might not be fully achievable in an austerity scenario, the need to meet their international commitments will remain at the forefront of governmental plans. Having previously adjusted the margins of submission to Nato when reporting this 2% figure in recent years, limited leeway now exists for further creative accounting.

As such even in the austerity scenario the percentage of GDP that the UK is forecast to spend on defense only drops to 1.7% by FY2024. This equates to a defense budget of US$49 billion in FY2024, instead of US$59.4 billion forecasted in the Pre-Covid-19 scenario. The figure here assumes a drop in the growth rate of the UK’s GDP at the end of FY2020 due to the economic impact resulting from measures taken to address the Covid-19 crisis.

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