Category Archives: Defence

Will Trump derail Starmer’s policy plans?

GK Associate Josh Owolabi shares his thoughts on the impact of a second Trump presidency on the government’s policy agenda.

Messaging from the Starmer government since Trump’s election victory has focused on projecting calmness. The government believes that it has done its ‘homework’ on Trump and that both countries will prosper while Trump is in office. However, Trump’s unpredictability was a key characteristic of his first presidency. His penchant for breaking – or threatening to break – norms is well established and will induce anxiety within Downing Street. Trump does not do ‘orthodox’ and, in contrast to his first term, now has the full support of the Republican Party to make radical policy changes that could impact the UK economy and the Starmer government’s delivery of its policy agenda.

Trump’s view on the use of tariffs symbolises his unorthodox approach. He has proposed a 60% tariff on imports from China and up to 20% on goods imported from other countries as part of his ‘America First’ strategy. Economists and research institutes across the United States have criticised the plan, arguing that it is counterproductive as it would make goods more expensive for American consumers. This would also be problematic for the Starmer government as the US is the biggest market for high value goods from the UK, including pharmaceuticals, automotive parts, and medical products, and would likely impact pricing for goods in these industries.

The National Institute of Economic and Social Research (NIESR) has argued that the imposition of even a 10% tariff would be damaging for the UK, reducing GDP growth by 0.7% in 2025. Given the fiscal climate, the government can ill-afford a reduction in growth if it plans to deliver on its pledges to improve access to healthcare and education (including a major expansion of early years entitlement in 2025).

Although Trump’s ‘trade war’ rhetoric is focused on China and the EU which could mean avoiding the full 20% tariff on exported goods, the UK is unlikely to receive special treatment. While Trump spoke of a UK-US trade deal during his first term, which would likely remove any tariffs, it is unrealistic to expect progress on a deal any time soon. The US has demanded the lowering of regulatory standards on American agricultural imports, such as ‘chlorinated chicken’, which has been a red line for previous governments.

The Starmer government is unlikely to budge on this issue given that the public does not support the lowering of food standards to secure a trade deal. Stephen Moore, a former economic adviser to Trump, has said that the UK must embrace the US economic model and move away from Europe’s “socialist” system, if it wants to agree a trade deal with the US. The Prime Minister has categorically rejected this view. During a speech at the Lord Mayor’s Banquet, he argued that his government does not need to choose between the US or the EU. Instead, Keir Starmer plans to forge closer economic ties with both. However, implementing this strategy will be incredibly difficult if Trump picks a fight with the EU and demands that trade with China is reduced.

Trump’s isolationist instincts will also cause concern. The government’s pledge to raise defence spending to 2.5% of GDP to support the Ukrainian war effort will therefore come under heavy scrutiny. Trump has long expressed frustration with the US’ allies for allowing their defence spending to fall after the Cold War ended, feeling that the US has been left to pick up the bill. Will the new Trump administration be satisfied that the UK is committed to reducing the overreliance on the United States? If not, the Starmer government may need to prioritise defence spending which would limit the government’s room to manoeuvre as it has just raised taxes by £40bn and still remains only just within its fiscal rules. Increased defence spending will make it harder for the government to spend more elsewhere, and get ailing public services back ‘on track’ or make investments that help it to grow the economy.

Helicopter over the dessert

Will Sunak’s Latest Reset Work?

GK Associate Hugo Tuckett examines the Prime Minister’s recent speech at Policy Exchange and whether he can address the Conservative Party’s declining fortunes.

Rishi Sunak turns his attention to security in bid to tackle Labour’s poll lead.

Following a dismal set of local election results and the high-profile defection of Dover MP Natalie Elphicke to Labour, Prime Minister Rishi Sunak has attempted to reset the political agenda. He used his latest relaunch at Policy Exchange, a Conservative-friendly think tank, to portray himself as the best leader to guide the country through what he described as the “dangerous and transformational” years ahead.

References were made throughout to ensuring the UK’s security in the wake of the Russian invasion of Ukraine and the ongoing conflict in the Middle East. It was also telling that Sunak made a pitch to voters on the opportunities presented by artificial intelligence – an area where he will feel comfortable promoting his tech credentials against the Labour leader Keir Starmer, who is 17 years his senior.

It is not unusual for incumbent (and unpopular) governments to paint opposition parties as inexperienced and incapable at a time of potential national peril. Former Prime Minister Gordon Brown famously argued “this is no time for a novice” in the wake of the 2008 financial crash amid David Cameron’s growing popularity. However, to go for this tactic right at the start of a general election campaign does suggest Sunak’s No.10 operation is running out of levers to pull to tackle Starmer’s seemingly unassailable lead in the polls.

Sunak’s pivot into security marks a clear distinction from his previous attempts to put the Conservatives on the path to election victory. At the 2023 Conservative Party Conference, he tried to paint himself as the change candidate and separate himself from the then 13 years of Conservative rule. Sunak was subsequently forced to adopt a continuity-focused strategy and defend the Conservatives’ record in office following David Cameron’s return as Foreign Secretary later that year.

The extent to which Sunak’s latest reset will work will depend on whether the electorate is still listening. The Conservative Party can highlight its commitment to raise defence spending to 2.5% of GDP by 2030, a pledge yet to be matched by Labour, who have adopted the looser definition of meeting the 2.5% figure “as soon as resources allow.” However, with Labour so far ahead in the polls and three changes of tack in less than a year, it does raise the prospect that the Prime Minister is trying to engage an electorate which is simply no longer interested in what the Conservatives have to offer.

Helicopters

Underfunded & Underprepared: Is Britain’s Defence Broken?

GK Adviser Felix Griffin dives into the challenges facing the MoD, from funding shortfalls to sluggish decision-making, and explores potential paths forward.

Incoherent strategy and a lack of funding is hampering progress

The UK’s Ministry of Defence finds itself grappling with a yawning funding gap, a rapidly evolving global landscape demanding a more responsive military, and an uncertain political landscape.

The biggest hurdle? Money – not just the lack of it but also how its spent.

Having fallen down the pecking order in the Chancellor’s recent budget, defence spending is set to receive no additional funding under the current government’s remaining tenure.

Meanwhile rising costs, particularly in nuclear deterrence and ambitious naval programmes, have created a staggering £16.9 billion hole in the MoD’s Equipment Plan – a shortfall which effectively handcuffs the MoD’s ability to modernise its equipment and carry out crucial projects necessary to maintain a robust defence posture.

There’s more to this than just money. Recent warnings highlight long-standing and systemic inventory failures in all three categories of inventory across the UK armed forces: Capital Spares, Raw Material and Consumables, and Guided Weapons, Missiles and Bombs. This raises a critical question: even with increased funding, would the UK be able to effectively equip its armed forces? The current evidence suggests not, presenting a deeper problem that needs addressing.

These issues point not only to a lack of innovation in procurement and strategic thinking, but also to sluggish decision-making processes that hinder the MoD’s ability to react swiftly to emerging threats.

Defence Secretary Grant Shapps’s stark assessment of the current situation – a transition from a “post-war world into a pre-war world” – rings all too true. The war in Ukraine serves as a stark reminder of the impact of large-scale conflict in Europe, while regional instability in the Middle East and the ever-growing tensions in the Asia-Pacific all demand a more agile and capable military from the UK. These diverse threats, which are by no means an exhaustive list, require a comprehensive and adaptable defence strategy from the MoD; something which the most recent Integrated Review (2021) failed to deliver, even after it was refreshed in 2023.

With the possibility of a new Labour government becoming increasingly likely, the party’s stance on defence policy and spending adds another layer of uncertainty.

I attended a Policy Exchange event on 28 February, which saw Labour’s Shadow Secretary of State for Defence, John Healey, articulate his party’s vision for national defence. While recognising outdated practices and the imperative to modernise, Labour’s defence plans appear largely underdeveloped, or at least under-communicated.

Despite outlining some interesting plans, including a new national armaments director and the enhancement of the Chief of Defence Staff’s role, Healey’s speech fell victim to his party’s commitment to fiscal prudence, lacking significant substance and ambition. Though highlighting the state of defence when Labour left in 2010, with comparatively higher levels of defence spending (2.5% of GDP), as well as better troop numbers and satisfaction (over 100,000 soldiers and 60% approval), Healey emphasised the need to streamline existing processes before making financial commitments, underscoring a cautious approach. Nevertheless, Labour’s emphasis on reform and strategic preparedness offers a glimpse into their aspirations for bolstering the nation’s security in an increasingly uncertain world.

Silouhette of soldier

Artificial Intelligence: ‘The Future of Defence Capability’

What does the ongoing conflict in Ukraine mean for private equity investment in UK defence?

GK Senior Adviser Hugo Tuckett analyses the historical challenges for private equity investment into the defence sector, and takes a look at investment landscape in the years ahead. 

Defence has historically been a challenging area for private equity. The nature of contracts, cash flow models and high barriers to entry have often been cited as reasons for a lack of investment. This is alongside the perception that the industry is dominated by a relatively closed shop of actors.

However, has the Russian invasion of Ukraine changed the outlook for private equity in this space? Does an on-going war in the Europe open the door to investment in technologies with an offensive application?

ESG considerations have certainly softened. While private equity houses have traditionally steered away from investing in defence due to ethical considerations, public attitudes in the UK indicate a continued desire to provide military support to Ukraine. YouGov polling, conducted in February 2023 on the one-year anniversary of the Russian invasion, found that 65% of Britons supported sending additional weaponry and supplies to the country. There was also more support (45%) than opposition (25%) for cyber-attacks against Russian military capabilities.

Furthermore, the Government’s continued desire to financially back UK defence points to a healthy procurement environment in the years ahead. The Defence Secretary’s very public lobbying efforts to secure additional funding on top of the multi-year settlement agreed in 2020 have certainly been fruitful. At the recent Budget, the Chancellor, Jeremy Hunt, announced that the Government will commit an extra £11bn to the defence budget over the next five years and confirmed the decision to increase investment by £5bn over the next two.

Where, therefore, does private equity most stand to gain in the industry? KPMG analysis from 2021 highlights two possible areas private equity houses might look to explore. Firstly, supply chain consolidation. Liquidity issues amongst the supply base lends itself to lower-tier suppliers joining together to create economies of scale and gain access to more capital. Secondly, in innovation. For growth-orientated investors, cutting-edge assets that become available to the market via divestments from parent companies presents an opportunity for private equity houses to bring their expertise to assets that could go onto become extremely successful businesses.

While, of course, some parts of the defence industry remain outside the scope of private equity, shifting public attitudes to offensive military technology and growing Government financial backing certainly point to a welcoming investment landscape in the years ahead.

GK consultants are on hand to offer investment professionals our expertise helping to assess the UK’s political and regulatory outlook. Please get in touch at hugo@gkstrategy.com for more information.