What is Military Keynesianism?
John Maynard Keynes suggested that the state had a responsibility to use its fiscal power (raising money via taxation and public borrowing) to stimulate the economy through spending when economic activity was lower than its potential. Keynes’ notion was that the state should intervene in a counter-cyclical manner. Thus, when the economy was under-performing, the state should invest and fund economic activity. But when the economy was booming to the point of ‘over-heating’, then the state should rein in expenditure and investment, to reverse any stimulus so as to dampen down economic excesses. The state should moderate both boom and bust, to produce prolonged periods of moderate and sustainable economic growth.
Military Keynesianism is the specific use of investment and procurement in defence, as an economic stimulus. This is perhaps best typified by the actions of what is sometimes referred to as the military-industrial complex in the USA after the Second World War, which some would argue continues to this day. Spending through contracting for material and services (such as research), but also directly via the US Department of Veterans Affairs, have been argued (not least of all by the military themselves), to have provided a continuing and positive stimulus for the US economy. And, in the past, an implied Military Keynesianism has been behind claims that many jobs depend on the continuance of the UK’s national security being equipped by UK based firms.
Since the election of President Trump, the commitment of the United States to global security has been thrown into doubt. In the early months of 2025, it has become clear to governments in European countries and other allies of the USA, that the current administration is much less concerned with supporting security arrangements outside the USA’s immediate regional interests.
So the question is: in the new international security environment, does a more explicit Military Keynesianism make sense for the UK?
Defence policies re-examined
European countries, including the UK, have been swiftly re-examining their defence policies. This is in response to US President Donald Trump’s retreat from the USA’s global commitments, and specifically his disagreements with Volodymyr Zelenskyy, President of Ukraine, regarding US support for Ukraine’s resistance to the Russian invasion during the infamous meeting of 28 February this year.
Part of this re-examination seems likely to involve either an explicit, or perhaps more likely an implicit, adoption of an approach to fiscal policy often referred to as Military Keynesianism, as described above. In September 2023, I suggested that the previous Conservative Government’s support for military procurement in Barrow-in-Furness was a form of localised Military Keynesianism. Now its logic seems to have moved from applying to a regional policy associated with ‘levelling up’, to becoming a national priority, as seen by the current Labour government, in March 2025.
Labour’s fiscal and security stances combined
Labour Chancellor Rachel Reeves has declared that all government policies will be required to demonstrate how they contribute to the revival of economic growth in the UK. This ‘growth test’ is intended to show that the Labour government is focussed on the country’s economic revival. While it is less clear exactly what criteria Reeves and her Treasury team will use to make this judgement, it is likely to include how government policies would promote economic activity that would have a multiplier effect.
The multiplier effect can be seen when government expenditure cascades through the economy: for example, investment in infrastructure requires both the purchase of goods and services and the employment of workers. These workers spend their wages and salaries across their localities and beyond. Provided that goods and services are purchased within the UK economy, that money continues to circulate to other businesses and workers. The multiplier is a key component of the Keynsian view of how the state can act in a counter-cyclic manner to smooth the ups and downs of economic activity.
This is implied in Prime Minister Keir Starmer’s statement on 25 February this year, that ‘we must change our national security posture’, and spend more on defence, and see this as a ‘whole society effort’ to protect the country. While in the immediate sense a response to the shift in security emphasis from President Trump, this is also a recognition that Russia continues to present a real and present danger to Europe.
He then went on to emphasise: ‘We will use this investment as an opportunity. We will translate defence spending into British growth, British jobs, British skills and British innovation. We will use the full powers of the Procurement Act 2023 to rebuild our industrial base’. This neatly and explicitly links national security to Rachel Reeves’ requirement for policies to be clear on their impact on reviving the UK’s economic development.
While neither Reeves nor Starmer has called this Military Keynesianism, it is pretty obvious that this is what is being envisaged. A move to expand defence procurement while generating domestic investment and innovation is always the cornerstone of implied or explicit Military Keynesianism. However, central to the success of such a policy is the procurement of arms and military materiel from UK suppliers, rather than by merely buying in material from other countries, thereby losing the economic multiplier effect for the British economy.
BAE Systems and the system of UK defence procurement
BAE Systems, the UK’s largest defence contractor, is also the largest non-US arms supplier in the world (ranked sixth overall). However, at present less than 40% of its output is accounted for by UK government spending. For Military Keynesianism to have the stimulus effects posited by the UK government, procurement needs to do more than merely displace output previously exported or sold to private British security contractors. As far as the multiplier effect is concerned, as long as the arms are bought in Britain, where they are used is not important. But, if there is to be an effective increased stimulus, extra manufacturing and services capacity has to be developed, so that increased demand due to expanded military spending is not met by imports.
In 2023, the UK arms exports were £11 billion, of which just under £4 billion was conventional weapons. Therefore, any uplift in the defence budget would need not only to be spent in the UK, it would need to do more than merely displace export and non-government-procurement-related capacity. It would also need to be given over to making more material to retain in the UK. Therefore, the crucial question is how quickly can the UK defence sector expand capacity to fulfil the country’s defence procurement needs?
Historically, due to the funding profile of UK defence, the armed forces have relied on US contractors for fast re-armament and cheaper weapons, while leaving UK arms manufacturers with more specialised contracts and longer lead times in a procurement system that has often been criticised as expensive and inefficient. Whether the UK’s specialised firms can replace the arms supply chain from American firms will be the crucial element that allows some economic stimulus to be gained from the expanded defence budget. Although no data is published on UK arms imports, the reliance on US arms suppliers is quite clear. Any continued reliance on imported armaments would undermine the economic stimulus from, and benefits of, an implied Military Keynesianism, as the money spent on them would leave the UK.
While it may be the case that BAE Systems, as an integrated conglomerate whose various divisions supply many different armaments and equipment, could relatively rapidly engineer an expansion in capacity, unless the smaller, more focussed suppliers can follow suit, or new UK suppliers are quick to develop as UK government demand expands, then the economic stimulus from expanded military procurement will not materialise.
Whatever one thinks of defence procurement, it is possible that this will, finally, deliver the stimulus that the UK needs, to escape the long shadow of a decade or more of austerity. However, this is only plausible if the UK defence sector can rapidly expand capacity in the next few years. For that to take place, some stability in the defence budget will be required, and a clear ‘buy British first’ logic in military procurement will need to be adopted. Otherwise we will have the implied declarations of Military Keynesianism, but none (or little) of the economic stimulus.
