The Opportunity Costs of Uk Defence Spending

Defence expenditure is a major item in almost all modern economies ranging from 1.0pc of the national income of Japan to between 10pc and 20pc of countries engaged in war. Pakistan spends a third of its national income on defence. 

The ending of the Cold War in 1989-90 allowed both Eastern Bloc countries and the West to cut back on defence spending. The IMF has predicted that a 20pc cut in defence spending over five years would lead to major improvements in the world economy, within 10 years the IMF predicts that national income in the rich industrial countries would increase by about $60 billion. Reduction in military spending of this magnitude would also increase consumer spending by about $83 billion. In 1992 the USA spent 5.2pc of its national income on defence whilst the UK spent 4.1pc – a drop of only 0.5pc since 1980.

However, these figures rose dramatically after the events of September 11th 2001, when American and UK both increase their defence budgets significantly in light of the perceived terrorist threat. In 2001 the UK spent £23 billion on defence. In 2003 the figure was nearer £25 billion. This was the first above-inflation rise in defence spending since the mid-1980s. America also drastically increased their defence budget. In the aftermath of 9/11, George Bush pledged to spend a massive $38 billion over the increase needed to keep up with inflation. 

The need to maintain an adequate defence uses up scarce resources such as labour, land and capital that might otherwise be used to produce civilian goods and services. Hence defence has an opportunity cost. One way to measure opportunity cost would be to consider the alternative civilian uses of the resources currently being used in defence. Government could, for example, switch defence spending towards building schools and hospitals.

Defence spending could also be put into investment goods such as factories, roads and rail track. As these facilities are used to make other goods and services, such reallocation of expenditure would lead to higher growth in national income over time. The opportunity cost came into sharp focus in the aftermath of 9/11 when Britain and American citizens became concerned about the amount of money being spent on the ‘war on terror’. As well as the moral and legal issues, people also asked if money could not better spent on improving health, education and the environment in their countries.