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PRESS RELEASE Embargo: 00:01 Wednesday 22 September 2004

REPORT DEBUNKS GOVERNMENT’S ECONOMIC JUSTIFICATION FOR SUBSIDIES TO UK ARMS EXPORTS

A report published today by three leading UK security policy think tanks, the British American Security Information Council (BASIC), the Oxford Research Group and Saferworld, counters the economic myths that the UK Government uses to justify its support for arms exports. Escaping the Subsidy Trap: why arms exports are bad for Britain - estimates that Government subsidies to arms exports cost the taxpayer at least £450m and possibly up to £930m a year. (1) These subsidies are not only explicit and direct but also comprise; cheap credit insurance from the Export Credit Guarantee Department (ECGD); Government investment in military R&D; and distorted Ministry of Defence (MoD) procurement. This last point is the subject of another report - also launched today - by Policy Exchange: The Best Kit: Why Britain’s Defence doesn’t need an all-British Defence Industry. (2)

“Our findings explode the economic myths that the Government uses to justify its support for arms exports. This support is based upon false economics and is bad for Britain.” Said Paul Eavis, Director of Saferworld.

“This should be required reading for Tony Blair and his ministers when the lobbyists from BAE Systems appear at their door arguing the case for further state handouts for the armaments industry. If defence companies can’t make it in the real world, it shouldn’t be up to the taxpayers to bale them out.” Said BASIC Director, Ian Davis.

“Full accountability over the Government’s arms export policies and practices is urgently needed. With no proven economic benefits, the Government must be far more open in demonstrating how its financial support for arms exports may be justified in terms of a foreign policy with an ‘ethical dimension’.” Said John Sloboda, Director of Oxford Research Group

GOVERNMENT MYTHS SUPPORTING ARMS EXPORTS

JOBS

The Government frequently cites protection of defence jobs as a key reason for supporting arms exports. The report concludes:

• Employment dependent on arms exports constitutes only 0.25 percent of the national labour force and that far from providing jobs, it diverts skilled workers and investment away from more effective job-creating activity in the civil economy.
• Any defence jobs lost could easily be accommodated within the overall job market, especially as the skilled manufacturing sector is currently facing shortages.

WIDER ECONOMY

The Government states that arms exports contribute significantly to the balance of payments and thus benefit the wider economy. The report reveals:

• Defence exports’ share of total UK exports has consistently reduced over recent years; to the point where in 2002, the gross UK arms exports revenue amounted to only 1.5 percent (£4,120m) of total UK exports.
• A number of leading academics and MoD’s own economists have concluded that the economic benefits of arms exports are insignificant and that the “balance of argument about defence exports should depend mainly on noneconomic considerations”. (3)

EFFICIENT DEFENCE PROCUREMENT

The Government often claims that by driving down the costs of production and equipment, arms exports benefit the MoD by reducing the costs of its domestic procurement. The report reveals:

• In a competitive global market, far from reducing the cost of domestic procurement, linking export orders with domestic procurement can lead to less suitable and more expensive equipment for our armed forces.
• The BAE-India Hawk jet deal in 2003 highlighted a rift between Government departments over the deal’s economic benefit and revealed that, rather than reducing the cost to the UK, it actually added a £1bn price tag to UK taxpayers.

THE SUBSIDIES

The report identifies three broad categories under which the UK Government props up economic inefficiency through its provision of financial support for arms exports:

• Direct subsidies (£31m subsidy)
  Through the Defence Export Services Organisation, the role of defence attachés, the use of the armed forces for promotion and the Defence Assistance Fund, the UK Government provides direct financial (as well as political) support to defence manufacturers totalling £31m.
  
  
• Export credits (£222m subsidy)
  ECGD provides export credit insurance to exporters and purchasers of UK equipment at premium rates that are well below those of the market.
  
  
• MoD’s procurement policy (£200m subsidy)
  In order to endorse UK-made equipment for future export orders, MoD appears prepared to purchase kit that is inferior or more expensive than that available from non-UK sources.

The Report also considers the impact of Government spending on defence R&D, concluding that this could represent a further subsidy of up to £483m.

ENDS

For a summary of the report go to: http://www.basicint.org/pubs/subsidy.htm.
For full text of the report go to: http://www.basicint.org/pubs/subsidy.pdf.

NOTES TO EDITORS

(1) This report updates the one published in 2001 by the Oxford Research Group and Saferworld: Ingram P and Davis I, The Subsidy Trap: British Government Financial Support for Arms Exports and the Defence Industry, (Oxford, 2001).

(2) The Best Kit: Why Britain’s Defence doesn’t need an all-British Defence Industry by Antonia Feuchtwanger; is also being published on 22 September 2004 by Policy Exchange (a think tank set up by Francis Maude and chaired by Michael Gove). This report is being launched at Policy Exchange, 10 Storey's Gate, London SW1P 3AY; RSVP to info@policyexchange.org.uk. Press enquiries to: Anna Reid, Director of the International Programme; tel: 020 7340 2650 / 2656; email: anna.reid@policyexchange.org.uk

(3) Report published by independent academics and the MoD’s senior economists: Chalmers M, Davies N, Hartley K and Wilkinson C, The Economic Costs and Benefits of UK Defence Exports (the York Report), York University Centre for Defence Studies, 2001, para 86, p 33. This was later summarised in: Chalmers M, Davies N V, Hartley K and Wilkinson C, ‘The economic costs and benefits of UK defence exports’, Fiscal Studies, September 2002, vol 23, no 3, pp 305-342.

Adair Turner The Former Director General of the CBI, calculates that were arms exports to fall by 35 to 40 per cent, this would merely stall GDP growth for six weeks. Turner A, Just Capital: The Liberal Economy, (London: Pan Books, 2001), p 362.

The report is available on the websites of the three organisations:
http://www.basicint.org | www.saferworld.org.uk | www.oxfordresearchgroup.org.uk