Trade wars, faltering economies, geopolitical threats, tensions between allies and rearmament - the urge to reach for 1930s history books is almost overwhelming.
Are we scaring ourselves witless, or are there good lessons to be learnt in political economy?
By history’s standards, eighty years is a very long time to have passed without being forced to engage in existential conflict, as the West’s leaders are more or less uneasily aware. And many of their advisers are becoming haunted by the economic and political storm clouds of the 1930s, seeing alarming similarities to that sorry decade in what the UK’s new Strategic Defence Review (SDR) describes as “a new era of threat”.
Politics versus economics
In truth, there are many differences between the 1930s and the 2020s. Today’s sluggish economic growth is very far from the economic wasteland, the dole queues and hyperinflation, of the Great Depression. And Western Europe is, despite weakening itself with some own goals such as Brexit and a rise in demagoguery, still more or less united, and composed of more or less well-functioning democracies. Another obvious difference is the existence of the nuclear deterrent (but more of that in a minute). Meanwhile there is one massive political similarity to the 1930s and one equally uncomfortable economic difference.
The big similarity is that, as in the 1930s, the West in general - and Western Europe in particular - has allowed the money it spends on defence to dwindle despite the evolution of a rogue state. If this time the rogue is not right inside the house, it is certainly trampling through the back yard. The big difference is that, for all the infinitely greater wealth enjoyed in the 2020s, the difficulties we will have in rebalancing the economy towards government’s primary historic duty to its citizens are even greater than they were ninety years ago.
As a share of GDP, defence spending in the UK had fallen to 2.2% in 1933, which today causes much head-shaking at the follies of a previous generation. But in 2024, UK defence spending was only a smidgin above that share of GDP, at 2.3% (and that on the most generous NATO definition). In the 1940s, defence spending in the UK had to rise to over 50% of GDP.
The US pattern is similar, if not quite so extreme: in 1933 defence spending was only 2.4% of GDP, peaking in 1945 at 41% and running at 3.4% today. It didn’t however start rising at all until 1941, since then as now, US Presidents were inclined to think that Europe should sort out its own mess.
Finding the money is one thing…
In an excellent commentary on UK rearmament for the Council on Geostrategy, the BBC’s former Economics Editor Paul Mason points out that such increases are unimaginable today, when the government’s total share of GDP is already nearly twice as large as it was in the 1930s. Add what amounts to another 48 per cent, and the economy disappears altogether. And, as so many big-mouthed politicians have discovered, there’s no easy way to halve that swollen base of other public spending for the simple reason that the population of the 2030s is so much older (and hence sicker) than the population of the 1930s.
Even the restoration of Cold War levels of defence spending (7% of GDP in the 1950s, still over 4% as the Berlin Wall was coming down) is beyond the UK Government’s ambitions. In the SDR the Prime Minister says cautiously that “we have set the ambition to reach 3% in the next Parliament, subject to economic and fiscal conditions”.
OK, there’s now 3.5% hinted at for later in the 2030s, but that still looks short of new challenges. The nuclear deterrent accounts for 14% of the UK defence budget, which would jump sharply if the Government felt obliged to develop a second delivery option, and/or if it had to make this genuinely independent of the United States.
Like all economic activity, rearmament requires capital and labour, money and human-power. Money, certainly, looks a problem, given the “fiscal conditions” to which the Prime Minister elliptically refers in the SDR. Nothing new there, of course: peaking at 252% of GDP in the 1940s, the burden of second world war borrowing dragged on the UK for decades. Even without rearmament, it is a worry again today, when the global public debt markets are becoming extremely crowded and jumpy.
The US debt-to-GDP ratio is higher than at the end of the second world war, and significantly higher than the UK’s, yet the President’s “big, beautiful Bill” threatens to take it higher still. That’s finally hurt the US’s credit rating, but smaller economies such as the UK also suffer the backwash.
But dangerous are they are, our debt levels are not what make things different. Indeed, in the early 1930s the UK’s debt ratio was, in fact, already almost twice as high as it is now.
The biggest difference today is not financial but human capacity.
The people problem
The most evident feature of the Great Depression was spare human capacity. In 1933, unemployment in the United States reached nearly 25%. In the UK, it was not much lower. In Germany, fatally, the unemployment rate was close to a third of the workforce.
By contrast, unemployment in the US and UK today is 4-4.5%, and even in Germany it is not much over 6%. It’s true that all these countries, and the UK in particular, have seen a rise in “economic inactivity” - people not looking for work. If you add them to recorded unemployment, the out-of-work wedge is larger. But it’s hard to see much of this as spare capacity. People are on the “inactive” list for very diverse reasons (retired, carers, unwell, discouraged by job search difficulties or encouraged not to try by perverse incentives), and are not easy to bring back into the workforce.
A quick comparison of employment rates (the percentage of the working age population actually in a job) sets all this in proportion. When you try to measure the difference in spare human capacity then and now, a simple fact is that the UK’s employment rate today is 75%, while it was only 61% at the height of the Great Depression.
Programmes (including defence) to boost job creation therefore did deliver growth in the 1930s, and in the UK actually brought government borrowing down, until the strain of existential war sent it shooting up again. The part played by rearmament in ending the Great Depression is much disputed. But what is clear is that while governments seeking to boost their military forces and defence industries might have been short of money to do so, they certainly weren’t short of human material. By contrast, today the UK is only managing a dribble of 1%-1.5% economic growth by boosting its workforce with six figures of (net) immigration each year. So where is the human-power to deliver the SDR, and inevitably more, to come from?
Even in the 1930s, with all that unemployed human capacity, the economic shift to defence spending and defence industries still wasn’t easy. Today, for all the Prime Minister’s hopeful talk of using it to boost the economy out of its current torpor, with new defence industries bringing life to the regions, finding the human resources as well as the money will be a massive task.
Skills, innovation and the STEM shortfall
Of course defence has become more high-tech and less dependent on boots on the ground. Politics reinforces that trend: public opinion is quite as uncomfortable with putting the men and women wearing those boots at risk as it was in the 1930s, when memories of trench slaughter were still very raw. But even for a transformation to new-tech defence there are recruitment difficulties at all levels. Refilling “hollowed out” armed forces will be challenging. All parts of the economy, perhaps especially defence, have got to get much smarter about how they train and use people.
In the US, the President’s claims of a “Trump bump” in military recruitment have provoked reminders of pre-Trumpian improvements in recruitment processes, and the same overhaul has been taking place in the UK. However, cultural factors are still an issue, as the SDR notes. Two or three generations ago, every UK family had an ill-fitting uniform in the attic, old memories of war or at least national service; today most have lost touch with the armed forces, whose remaining members sometimes have to shed those uniforms to feel safe on the streets. That’s nothing new in history, from way before Kipling immortalised in verse the changing public attitudes to squaddies in peace and war. But it doesn’t help.
In a tight labour market, boosting recruitment will have a price tag unlikely to be properly reflected in defence budgets. And most critically of all, the shortage of STEM skills amongst school leavers and graduates is already causing anxiety in the defence industries.
The SDR puts down important markers in terms of structural organisation, innovation and engagement with entrepreneurs, as well as the efficient use of skills - is it a signal that an engineer rather than a combat veteran should have just been chosen as the new head of the UK’s armed forces? But the foundations of success, requiring a recalibration of schools education to meet the most obvious skills needs, was beyond its remit. For all the talk in the SDR of a “whole society” response, it’s far from clear that the message has spread government-wide.
More than a wake-up call
Oversleeping earlier signs of crisis should bring one saving grace: less waste on past needs or outdated technologies. And the SDR’s authors have plainly done their best to free themselves from the besetting tendency of military pressure groups to demand more of what they have already rather than turn the page. Innovation, new technologies and skills - the SDR is insistent on the need for all of them. (Not, however, quite the message conveyed by the first illustration, a photo of soldiers trudging slowly through snow on skis…)
A combination of American isolationism, Ukrainian military tactics, terrorism and cyber threats has therefore been more than a wake-up call: it has signalled not just a new era of threat but a new world of potential defence responses. Money can’t provide this on its own: it requires top-down brilliance, but also bottom-up human resources; and that is an economic as well as a strategic megachallenge.
Guest Author: Baroness Sarah Hogg, Former Frontier Economics Chair