Arguments for Defence and Foreign Aid Spending in a Volatile World.
[2130 words]
I’ve spent a good part of my life arguing in favour of defusing conflict by means of unilateral disarmament and negotiation. I now find myself in the somewhat uncomfortable position of accepting that the United Kingdom, together with its European allies should be spending more money on arms. I don’t really need to explain the reasons for my personal turnaround to anyone who has been awake in the last week or so. A few key words will suffice. Vladimir Putin. Ukraine. Donald Trump.
The moral challenge of this shift in my thinking has been compounded by Keir Starmer’s announcement that in order for the UK to increase its defence spending the foreign aid budget will be cut by a comparable sum. This trade-off will appeal to a certain constituency which considers any money spent in favour of the poor and downtrodden overseas to be equivalent to pouring it down the drain. Generally this view is based on the notion that foreign aid is in large part siphoned off by corrupt officials in those parts of the world which are the intended destination for the funds with little of it ever reaching the people who are truly in need.
I dare say there is some truth in this picture. Not every foreign aid programme has produced a benign outcome. The matter deserves study. However, relentless hostility towards foreign aid is clearly a politically motivated distortion intended to please a populist constituency. It is a distortion which disregards the many documented achievements of foreign aid in famine relief, eradication of disease and the provision of tools and skills which have enabled people to rebuild lives shattered by the whole gamut of natural disasters.
Regardless, this hostility to aid is a perspective which utterly fails to understand the way in which a sovereign currency functions. Any funds in sterling directed by the UK towards foreign aid can only have value so long as they may ultimately be redeemed in the UK economy. If this was not possible the aid would be no better than monopoly money.
Foreign aid in sterling will in part be converted to local currencies in order to purchase goods and services in the context of immediate need. However, this conversion is a balanced transaction in which the equivalent sum in sterling enters the money markets. It does not simply evaporate but in fact continues to be traded. It passes into another financial realm where it may be sold to people wanting to travel to the UK or purchase goods in the UK market. Investors and speculators also have a part to play, buying and selling sterling on the international money markets.
Even if those funds pass through corrupt hands and are invested in poorly run projects, they are in effect an extension of the UK economy. Looked at in this way, foreign aid delivered in pounds sterling, may be seen as an expansion of UK economic activity into other territories and domains. Unfortunately, on our balance sheet, this is counted as a deficit rather than a credit.
Naturally one hopes that money given as aid is spent wisely on projects which may stabilise a crisis situation and result in the restoration of a sustainable local economy. The benefits of this outcome are obvious not just to the community which has been given help. Successful foreign aid projects are one of the more humanly decent ways of reducing the flow of migration into Europe and the United States, a phenomenon which is clearly causing much of our current cultural and political turmoil.
I do see a possible flaw in this economic argument in favour of foreign aid. In order to maintain the existing foreign aid budget, whilst also increasing our defence spending, we may be obliged to increase our national debt. In the absence of tax rises this could require cutbacks to service delivery within the United Kingdom, unless the economy grows sufficiently to make this unnecessary. That would indeed be a perverse outcome. However, I am going to suggest that we don’t actually need to borrow money to both increase defence spending whilst maintaining our foreign aid budget.
So far as foreign aid is concerned, if we look at this expenditure as an extraterritorial extension of the UK economy then it becomes possible to consider it as an investment rather than a deficit. So long as the demand which results from the aid budget does not compete for scarce UK resources, then the impact will be a modest stimulus to the domestic economy. It is quite possible that prices for domestic consumers might even come down given increased levels of production of some goods and services and consequent efficiencies.
Clearly foreign aid should not expand to the point where it undermines the domestic economy, but it is safe to say there is plenty of head room in this respect. Indeed there is a case to be made, at the very least, for restoring aid to levels which were sustained during the tenure of the previous government.
While foreign aid is an important tool in building good international relations, the current geopolitical climate also demands a reassessment of defence spending. Historical precedents, such as the US economy during World War II, offer valuable insights.
The US economy grew fat on the back of weapons manufacture during the Second World War. It was, at that point, an economy in recovery. It did not have a huge surplus to spend on arms manufacture. Funding was in fact supported by the sale of war bonds to the American public and increased taxation.
Whilst the logic of these funding measures is obvious, it is not at all clear that they were a necessary part of this massive direction of US resources into the armaments industry. Only a few years previously, with the US economy in a much more dire situation, the US Government had decoupled the price of the dollar from the price of gold. This, together with other measures, “enabled the Federal Reserve to increase the amount of money in circulation to the level the economy needed.” This increase in the money supply was the foundation of Roosevelt’s New Deal spending.
The process of the New Deal lays bare the reality that, if a government in command of a sovereign currency deems certain works to be vital then, it has the power simply to add funds to the bank accounts of companies and individuals who contract to carry out those works. Assuming the necessary resources are available within the jurisdiction of the government, It is not necessary to borrow money or increase taxation to achieve this objective. Such a view is rooted in Keynesian economic theory but supported also by Modern Monetary Theory as expounded, for example, by Professor Stephanie Kelton.
The US could have increased the money supply in World War Two to facilitate rearmament. Indeed, if that had been its policy, it would not have been necessary to pay the interest on the war bonds which were sold to raise money. In other words, the same objective could have been attained more cheaply.
Undeniably, funding rearmament through direct payments carries risks. Overuse or poorly judged application of such a policy could lead to inflation. If spending, for example, is targeted at or results in demand for resources which are in short supply, the price of those resources will rise and that may be a problem for the economy. Central banks have a role in managing such inflation by controlling interest rates but, in the case of any economic policy, there are judgments to be made. There will be opportunities to use the money supply to activate resources of labour and raw materials which are readily available or under used. Owing to the dominance of conservative economic thinking in recent times, such opportunities have been under exploited.
Though left leaning, the UK Labour Government languishes under this baleful economic constraint. It has, with greater reason, rejected the idea of issuing bonds in order to raise money for defence spending. This would increase an already worrying debt burden. The obvious option of increasing taxation has repeatedly been ruled out, though there are signs that a tax on the wealthy might be popular. Shockingly, the shoddy decision has been made to raid the aid budget for the purpose. As a result, Annaliese Dodds, International development minister, has felt it necessary to resign from the UK Cabinet.
The United States is a clear leader in the field of high tech armament production. It is possible the UK will use its increased defence budget to purchase these cutting edge weapons. That option certainly would require increased borrowing or taxation. Alternatively, the Government might direct funds towards our home grown armaments industry without increasing either debt or taxation.
Rory Stewart has pointed out that arms purchases from the US is increasingly compromised by the terms on which contracts are agreed. In the case of the most advanced military aircraft, the US demands that all surveillance gathered by these aircraft remains the property of the CIA. The US is also, understandably, secretive about the manufacture of their most advanced armaments. They retain control over supply of spare parts and other backup and training and have already shown some signs of not treating these as matters of priority.
With the US becoming less dependable as a defence ally, relying on them for the supply of weapons is looking increasingly unwise. Added to this, as Rory Stewart has also pointed out, the way in which the Ukraine war has been fought raises many questions about the type of weapons we would need to develop. Drone warfare has become very important in the Ukraine war, for both sides in the conflict.
The lesson may be that the UK, together with its European allies, should coordinate investment in their existing arms industries in order to develop the technology, expertise and weapons most appropriate to the threat posed by Russia. Such investment would have the obvious advantage of being a stimulus to the UK and European Economies. This should be an encouragement to defence spending, whichever of the funding options available may be chosen to make it happen.
As I write, President Zelensky has been ejected from the White House after being set upon by President Trump, an encounter provoked by Trump’s attack dog Vice President, JD Vance. This squalid piece of bullying took place in a press conference which was intended to herald the signing of a deal, a deal which promised that it might offer a foundation for a peace agreement. This prospect of peace now appears to be in tatters.
It seems improbable that the United Kingdom and Europe will, even with good intentions, be able to plug the armaments deficit which threatens as an immediate consequence of the capitulation of the Trump administration to Vladimir Putin. Nevertheless, it seems imperative that, in order to defend Ukraine and the other vulnerable European countries such as Poland and the Baltic States, the effort is made to do so. And whatever the scale of this challenge, we should continue to consider our foreign aid commitments as a complementary and potentially sound investment in both global stability and economic growth. It’s either that or submit to the hydra-headed monster that has emerged in the form of Donald Trump, JD Vance, Vladimir Putin,Viktor Orbán and other lesser bullies that are propagating in their wake.
Endnotes
Modern Monetary Theory https://en.wikipedia.org/wiki/Modern_monetary_theory
Full Fact – UK and NATO Defence Spending Explained In 2024 the UK spent just 2.33% of its GDP on defence, whereas the United States spent 3.38% of its much larger GDP. Only two European countries currently spend at a higher level on defence than the United States. They are Poland, on 4.12%, and Estonia on 3.42%. Not far behind them are Latvia and Lithuania. Their desire to protect themselves from an escalation of Russia’s current aggression is clear.
Our World in Data Foreign Aid
Roosevelt’s New Deal https://en.wikipedia.org/wiki/New_Deal The dollar was allowed to float freely on foreign exchange markets with no guaranteed price in gold. With the passage of the Gold Reserve Act in 1934, the nominal price of gold was changed from $20.67 per troy ounce to $35. These measures enabled the Federal Reserve to increase the amount of money in circulation to the level the economy needed.
Anneliese Dodds resigns over Keir Starmer’s decision to cut aid budget
The Rest is Politics Question Time: How Will Europe Defend Itself Also worth listening to is the following “special” episode, a post match analysis of the Oval Office showdown with President Zelensky.
With thanks to Florian Seriex/Action Against Hunger for the featured image, cropped from the original on Flikr.
Carruchan
Did I Say That?…Next Question!
Arguments for Defence and Foreign Aid Spending in a Volatile World.
[2130 words]
I’ve spent a good part of my life arguing in favour of defusing conflict by means of unilateral disarmament and negotiation. I now find myself in the somewhat uncomfortable position of accepting that the United Kingdom, together with its European allies should be spending more money on arms. I don’t really need to explain the reasons for my personal turnaround to anyone who has been awake in the last week or so. A few key words will suffice. Vladimir Putin. Ukraine. Donald Trump.
The moral challenge of this shift in my thinking has been compounded by Keir Starmer’s announcement that in order for the UK to increase its defence spending the foreign aid budget will be cut by a comparable sum. This trade-off will appeal to a certain constituency which considers any money spent in favour of the poor and downtrodden overseas to be equivalent to pouring it down the drain. Generally this view is based on the notion that foreign aid is in large part siphoned off by corrupt officials in those parts of the world which are the intended destination for the funds with little of it ever reaching the people who are truly in need.
I dare say there is some truth in this picture. Not every foreign aid programme has produced a benign outcome. The matter deserves study. However, relentless hostility towards foreign aid is clearly a politically motivated distortion intended to please a populist constituency. It is a distortion which disregards the many documented achievements of foreign aid in famine relief, eradication of disease and the provision of tools and skills which have enabled people to rebuild lives shattered by the whole gamut of natural disasters.
Regardless, this hostility to aid is a perspective which utterly fails to understand the way in which a sovereign currency functions. Any funds in sterling directed by the UK towards foreign aid can only have value so long as they may ultimately be redeemed in the UK economy. If this was not possible the aid would be no better than monopoly money.
Foreign aid in sterling will in part be converted to local currencies in order to purchase goods and services in the context of immediate need. However, this conversion is a balanced transaction in which the equivalent sum in sterling enters the money markets. It does not simply evaporate but in fact continues to be traded. It passes into another financial realm where it may be sold to people wanting to travel to the UK or purchase goods in the UK market. Investors and speculators also have a part to play, buying and selling sterling on the international money markets.
Even if those funds pass through corrupt hands and are invested in poorly run projects, they are in effect an extension of the UK economy. Looked at in this way, foreign aid delivered in pounds sterling, may be seen as an expansion of UK economic activity into other territories and domains. Unfortunately, on our balance sheet, this is counted as a deficit rather than a credit.
Naturally one hopes that money given as aid is spent wisely on projects which may stabilise a crisis situation and result in the restoration of a sustainable local economy. The benefits of this outcome are obvious not just to the community which has been given help. Successful foreign aid projects are one of the more humanly decent ways of reducing the flow of migration into Europe and the United States, a phenomenon which is clearly causing much of our current cultural and political turmoil.
I do see a possible flaw in this economic argument in favour of foreign aid. In order to maintain the existing foreign aid budget, whilst also increasing our defence spending, we may be obliged to increase our national debt. In the absence of tax rises this could require cutbacks to service delivery within the United Kingdom, unless the economy grows sufficiently to make this unnecessary. That would indeed be a perverse outcome. However, I am going to suggest that we don’t actually need to borrow money to both increase defence spending whilst maintaining our foreign aid budget.
So far as foreign aid is concerned, if we look at this expenditure as an extraterritorial extension of the UK economy then it becomes possible to consider it as an investment rather than a deficit. So long as the demand which results from the aid budget does not compete for scarce UK resources, then the impact will be a modest stimulus to the domestic economy. It is quite possible that prices for domestic consumers might even come down given increased levels of production of some goods and services and consequent efficiencies.
Clearly foreign aid should not expand to the point where it undermines the domestic economy, but it is safe to say there is plenty of head room in this respect. Indeed there is a case to be made, at the very least, for restoring aid to levels which were sustained during the tenure of the previous government.
While foreign aid is an important tool in building good international relations, the current geopolitical climate also demands a reassessment of defence spending. Historical precedents, such as the US economy during World War II, offer valuable insights.
The US economy grew fat on the back of weapons manufacture during the Second World War. It was, at that point, an economy in recovery. It did not have a huge surplus to spend on arms manufacture. Funding was in fact supported by the sale of war bonds to the American public and increased taxation.
Whilst the logic of these funding measures is obvious, it is not at all clear that they were a necessary part of this massive direction of US resources into the armaments industry. Only a few years previously, with the US economy in a much more dire situation, the US Government had decoupled the price of the dollar from the price of gold. This, together with other measures, “enabled the Federal Reserve to increase the amount of money in circulation to the level the economy needed.” This increase in the money supply was the foundation of Roosevelt’s New Deal spending.
The process of the New Deal lays bare the reality that, if a government in command of a sovereign currency deems certain works to be vital then, it has the power simply to add funds to the bank accounts of companies and individuals who contract to carry out those works. Assuming the necessary resources are available within the jurisdiction of the government, It is not necessary to borrow money or increase taxation to achieve this objective. Such a view is rooted in Keynesian economic theory but supported also by Modern Monetary Theory as expounded, for example, by Professor Stephanie Kelton.
The US could have increased the money supply in World War Two to facilitate rearmament. Indeed, if that had been its policy, it would not have been necessary to pay the interest on the war bonds which were sold to raise money. In other words, the same objective could have been attained more cheaply.
Undeniably, funding rearmament through direct payments carries risks. Overuse or poorly judged application of such a policy could lead to inflation. If spending, for example, is targeted at or results in demand for resources which are in short supply, the price of those resources will rise and that may be a problem for the economy. Central banks have a role in managing such inflation by controlling interest rates but, in the case of any economic policy, there are judgments to be made. There will be opportunities to use the money supply to activate resources of labour and raw materials which are readily available or under used. Owing to the dominance of conservative economic thinking in recent times, such opportunities have been under exploited.
Though left leaning, the UK Labour Government languishes under this baleful economic constraint. It has, with greater reason, rejected the idea of issuing bonds in order to raise money for defence spending. This would increase an already worrying debt burden. The obvious option of increasing taxation has repeatedly been ruled out, though there are signs that a tax on the wealthy might be popular. Shockingly, the shoddy decision has been made to raid the aid budget for the purpose. As a result, Annaliese Dodds, International development minister, has felt it necessary to resign from the UK Cabinet.
The United States is a clear leader in the field of high tech armament production. It is possible the UK will use its increased defence budget to purchase these cutting edge weapons. That option certainly would require increased borrowing or taxation. Alternatively, the Government might direct funds towards our home grown armaments industry without increasing either debt or taxation.
Rory Stewart has pointed out that arms purchases from the US is increasingly compromised by the terms on which contracts are agreed. In the case of the most advanced military aircraft, the US demands that all surveillance gathered by these aircraft remains the property of the CIA. The US is also, understandably, secretive about the manufacture of their most advanced armaments. They retain control over supply of spare parts and other backup and training and have already shown some signs of not treating these as matters of priority.
With the US becoming less dependable as a defence ally, relying on them for the supply of weapons is looking increasingly unwise. Added to this, as Rory Stewart has also pointed out, the way in which the Ukraine war has been fought raises many questions about the type of weapons we would need to develop. Drone warfare has become very important in the Ukraine war, for both sides in the conflict.
The lesson may be that the UK, together with its European allies, should coordinate investment in their existing arms industries in order to develop the technology, expertise and weapons most appropriate to the threat posed by Russia. Such investment would have the obvious advantage of being a stimulus to the UK and European Economies. This should be an encouragement to defence spending, whichever of the funding options available may be chosen to make it happen.
As I write, President Zelensky has been ejected from the White House after being set upon by President Trump, an encounter provoked by Trump’s attack dog Vice President, JD Vance. This squalid piece of bullying took place in a press conference which was intended to herald the signing of a deal, a deal which promised that it might offer a foundation for a peace agreement. This prospect of peace now appears to be in tatters.
It seems improbable that the United Kingdom and Europe will, even with good intentions, be able to plug the armaments deficit which threatens as an immediate consequence of the capitulation of the Trump administration to Vladimir Putin. Nevertheless, it seems imperative that, in order to defend Ukraine and the other vulnerable European countries such as Poland and the Baltic States, the effort is made to do so. And whatever the scale of this challenge, we should continue to consider our foreign aid commitments as a complementary and potentially sound investment in both global stability and economic growth. It’s either that or submit to the hydra-headed monster that has emerged in the form of Donald Trump, JD Vance, Vladimir Putin,Viktor Orbán and other lesser bullies that are propagating in their wake.
Endnotes
Modern Monetary Theory https://en.wikipedia.org/wiki/Modern_monetary_theory
Full Fact – UK and NATO Defence Spending Explained In 2024 the UK spent just 2.33% of its GDP on defence, whereas the United States spent 3.38% of its much larger GDP. Only two European countries currently spend at a higher level on defence than the United States. They are Poland, on 4.12%, and Estonia on 3.42%. Not far behind them are Latvia and Lithuania. Their desire to protect themselves from an escalation of Russia’s current aggression is clear.
Our World in Data Foreign Aid
Roosevelt’s New Deal https://en.wikipedia.org/wiki/New_Deal The dollar was allowed to float freely on foreign exchange markets with no guaranteed price in gold. With the passage of the Gold Reserve Act in 1934, the nominal price of gold was changed from $20.67 per troy ounce to $35. These measures enabled the Federal Reserve to increase the amount of money in circulation to the level the economy needed.
Anneliese Dodds resigns over Keir Starmer’s decision to cut aid budget
The Rest is Politics Question Time: How Will Europe Defend Itself Also worth listening to is the following “special” episode, a post match analysis of the Oval Office showdown with President Zelensky.
With thanks to Florian Seriex/Action Against Hunger for the featured image, cropped from the original on Flikr.
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About Stephen Shellard
I am a retired College lecturer, having worked originally in supported programmes but latterly having taught social science subjects, Psychology and Politics, though my degree was in Sociology. I am from Newry in Northern Ireland, but now live in Dumfries in South West Scotland. https://carruchan.wordpress.com/about/