UK Defence Budgets Set To Be Cut Whoever Wins Election, Says UBS

[Ryan Ruck]

UK Defence Budgets Set To Be Cut Whoever Wins Election, Says UBS

February 3, 2015

Whichever government wins the UK election in May, defence budgets could be cut, according to analysts at UBS.

In a report on the sector it picks Qinetiq - the former Ministry of Defence research department - as the company most exposed to UK defence, with others having diversified elsewhere, notably the US. The bank says:

We are increasingly concerned about the outlook for UK defence budgets, especially under a potential Conservative government, but we see little political will to increase defence spending on either side of the political spectrum. Possible scenarios could see ~20% nominal declines from 2015 to 2019 under a Conservative government and ~10% nominal under Labour. The size of these cuts looks shocking and we believe that the cuts could end up being smaller, but we are concerned that there could be knee- jerk reaction against the sector as a whole.

Most of the UK defence companies have limited exposure to the UK defence market, having diversified to the US over the last 15 years or so. QinetiQ is the most exposed with about 75% of sales to the UK defence/security market. If in line with the budget, we estimate that a 10% cut to the UK defence budget (Labour) would reduce QinetiQ’s fair value by about 8% and 20% cut (Tories) would reduce it by about 17%.

On the other hand, US defence budget growth probably will hit sequester wall.

President Obama submitted a $534bn base defence budget, which is about 8% up versus the 2015 budget, versus UBS estimate for low single digit growth and sequestration to be removed. However, sequestration is still in place in law and the proposed budget will breach the current limit of ~$500bn. Given the Republican majority they will be forced to decide whether they are defence hawks or fiscal deficit hawks. We believe that they will end up being fiscal deficit hawks, the sequester will remain in place, although it will probably be stretched up in a one year deal, and the budget increases will end up more in the 2-4% range to $506-516bn.

If the US budget does increase as submitted, we estimate that the main beneficiaries will be BAE Systems, Cobham and Ultra Electronics with 3-4% potential profit uplift in 2017 (there is a 6-24 month delay between budget and outlay) and about 3% increase to fair value

[Ryan Ruck]

Britain Must Increase Defence Spending To Halt Spreading Chaos Say MPs

Threats around the world are so numerous that British forces may be needed in a dozen warzones at once and currents plans for the military have been overtaken by world events

March 24, 2015

Britain must increase defence spending to the Nato minimum to help stop chaos spreading from the Western Mediterranean to the Black Sea, MPs warn in a new report.

Failure to hit the 2 per cent of GDP Nato spending target would be “extremely damaging” to Britain’s military credibility they say, while further cuts would undermine the whole alliance.

Threats around the world are so numerous that British forces could be needed in a dozen warzones at once and current plans for the military have been overtaken by world events.

The rise of Islamic State and the increase in Russian aggression mean Britain’s 2010 defence plans “no longer reflect the new threats to peace around the world” the cross-party Defence Select Committee says.

Britain must rebuild some of the military options it has scrapped since the end of the Cold War, including building more warships and bolstering defences against missile attack and nuclear, biological or chemical weapons. The eventual cost may be more than a 2 per cent of GDP budget, the committee said.
Their report says the Coalition’s 2010 cost-cutting defence review is out of date because it assumed a future of only lengthy Afghanistan-style operations, rather than confrontations with modern military rivals.

Instead, Vladimir Putin’s aggression in Ukraine means “for the first time in twenty years, an advanced military state has challenged the borders of European nations.”

Security challenges in the Middle East, Africa and South Asia have meanwhile “increased dramatically in scale and complexity”.

Rory Stewart, chairman of the Commons Defence Committee, said current plans for the size and shape of the Armed Forces drawn up after the 2010 election were based on a single long term Afghan-style mission.

He said: “But now we can see that we might be needed in a dozen different theatres, concurrently, confronting terrorism or lightly armed, paramilitaries in one setting and heavily armed, formed units of an advanced military nation in another."

He added: “It is vital to rethink the fundamental assumptions of our defence planning, if we are to help arrest the descent into chaos, which threatens to spread from the Western Mediterranean to the Black Sea.”

Michael Fallon, the Defence Secretary, rejected suggestions Britain needed to rebuild its forces as “nonsense”.

The Government has been keen to stop defence becoming an election issue, but the MPs' report follows a string of warnings from former military leaders and allies worried about deeper cuts.



David Cameron has refused to commit Britain to the 2 per cent defence spending mark beyond next year, despite lecturing allies on its importance at last year’s NATO summit in Wales. Current forecasts see the military budget falling to as little as 1.75 per cent by 2019, while post election austerity cuts could see it plunge further.

If Britain falls below the threshold, “the impact on the UK’s credibility as a military ally would be extremely damaging, particularly in the eyes of the US and our European allies”, the report found.

“It would damage UK leadership in Nato and Putin’s Russia will be looking very carefully for signs of weakness in Nato.”

If the UK cut spending it would “undermine the alliance as a whole”.

Mr Fallon said: “The suggestion that we need to rebuild our defence capabilities is nonsense.

“The UK has the second largest defence budget in NATO and the largest in the EU. We are the US’s largest partner in the coalition air effort against ISIL – bearing more of the load in terms of strikes in Iraq than we played in either of the Gulf Wars.”

“Our response to events in the Middle East, Sierra Leone and Ukraine recently highlight that the flexible strategy adopted under the 2010 SDSR and Future Force 2020 is working.”