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			Corporate Responsibility Does the defence industry really benefit the economy? In 2003, we commissioned a report by Oxford Economic Forecasting (OEF) to measure the contribution that BAE Systems makes to the UK economy. Here we debate with the British American Security Information Council, an independent research organisation, the significance of the study’s findings.        Julian Scopes Head of UK Governement Affairs, BAE Systems Paul Ingram Senior Analyst, British American Security Information Council Emma Mayhew Project Analyst, British American Security Information Council London, December 2004 London, December 2004 BASIC characterises UK Government purchasing from BAE Systems as a ‘subsidy’. This argument is misplaced. The UK operates the most openly competitive defence market. BAE Systems has to win on merit by demonstrating value for money. International comparisons demonstrate that BAE Systems delivers quality equipment at very cost-effective prices. BASIC describes research and development (R&D) spending by the Government through BAE Systems as a subsidy. This is incorrect. Customers usually pay for R&D through pricing – in every sector from automotive to pharmaceuticals. The defence sector is different, because the customer (the Government) dictates in considerable detail specific requirements, often under tight security rules. It is therefore more effective for the customer to pay for R&D direct. Buying ‘off the shelf’ sounds superficially attractive but ignores the sensitive uses to which defence equipment is put. The nation needs control of the technology to ensure that equipment can be upgraded and modified to meet UK requirements, often at very short notice, and can be supported throughout its 30-year plus life. It is naive to think that without the pressure of home-grown competition, the UK customer would not end up paying for R&D on supposedly off the shelf equipment bought from overseas. The only effect of such purchasing would be to kill off one of the UK’s few remaining centres of engineering and manufacturing excellence. In some cases it would mean buying off the shelf from a monopoly overseas provider at increased cost. R&D spend also creates other significant economic benefits – new technologies, processes and skills typically spill over into the whole sector (eg as it is replicated by competitors), into other sectors and eventually throughout the whole UK economy. The British Government’s view is that the UK benefits from properly approved and targeted defence exports. Academic research also suggests a strong causal relationship between exports and economic benefits such as productivity, higher employment and sales. Increased throughput in the British defence industry provides a pricing benefit to the Government and there are benefits from longer production runs and commonality of equipment with allies. An Oxford Economic Forecasting (OEF) study, commissioned by Defence Industries Council, indicates that the cost to Government of supporting defence exports amounts to some £140 million at most (and some of this is attributable to broader defence diplomacy objectives, so would continue anyway). But the UK Government benefits from more efficiently priced defence equipment by £300 million a year. BASIC, and other NGOs, disagree in principle with defence exports. However the facts indicate that defence exports benefit the economy and national security. BASIC argues that the economy would benefit if the resources applied to defence were invested in other industrial sectors. However the Government has to continue to spend money on equipping the armed forces in the interests of national security. As long as the UK defence industry continues to make good value, high-quality products the economy will benefit if this money is spent on equipment from the UK rather than off-the-shelf products from other countries. Claims that arms production in general, and BAE Systems in particular, presents a special contribution to the UK economy deserving of public support need particular scrutiny. Publishing a report (the Oxford Economic Forecasting study) that simply outlines the level of exports, investment, employment and contribution to the exchequer does not in itself settle the matter. We can debate the level of taxpayers’ money received by BAE Systems to facilitate its exports (we believe it to be hundreds of millions of pounds), but there can be no doubt that there is a significant subsidy from Defence Export Services Organisation support, contacts with (or promotion by) military attachés, official visits and use of military personnel, cheap export credits and the influence of exports on Ministry of Defence (MoD) procurement. There is also the significant government spend on military R&D. Since the 1980s transformation of the coal industry, mainstream economists have believed that industries generally should stand on their own two feet and that subsidies distort efficient allocation of resources. There are, of course, exceptions to this (such as correction for externalities, reallocation of wealth, public services), but employment and exports are not acceptable rationales under prevailing economic theory. In any case, arms exports hardly amount to an essential element of the UK economy. We are now talking of little more than 60,000 jobs, 0.2% of the national labour force and fewer than the number finding new jobs in the average month. Even MoD economists agree that reduced arms exports would create more jobs elsewhere in the economy. BAE Systems’ turnover is around a quarter of one per cent of the UK’s total. The tax generated by BAE Systems reported in the Oxford Economic Forecasting study was made up of employee’s income tax and NI contributions, as the company made a loss in 2002. But what of BAE Systems’ contribution to reducing MoD spend? The MoD claims that exports save their procurement budget £350 million a year. But how the department came to this figure and how these savings are actually made remains a mystery. These savings would not exist if MoD stuck by its Defence Industrial Policy and placed value for money (in the broadest sense) over the lifecycle of equipment as its prime objective. If it did, then it would buy more off the shelf. Put simply, there is no doubt that BAE Systems makes contributions to the economy. But are those contributions more significant than those that would be made were the resources (skilled and unskilled workers and capital) applied elsewhere in the economy? The jury is still out, but the challenge is strong. This must call into doubt the basis upon which the government provides the company with such generous financial support. Back to Top