The defence dividend and the Northern Arc

Posted on: 25 March 2025 by Ian Wray in Blog

The Prime Minister’s decision to increase UK defence spending will have significant economic consequences and is widely seen as a growth opportunity for defence contractors. Ian Wray asks what might be done to deploy the ‘defence dividend’ funding more effectively and how greater benefits could be secured for North West England especially as part of a ‘Northern Arc’.

In The Wealth of Nations, Adam Smith had no doubts about the economic value of military expenditure: “The whole army and navy are unproductive labourers… and are maintained by a part of the annual produce of the industry of other people”.  These days we hear much about how large a share of our GDP we are (or should be) spending on defence in an increasingly uncertain world - and military expenditure is frequently described as an investment.

Was Adam Smith mistaken in describing the military as an unproductive drain? If you look at the 2022 comparative figures you will find that the UK was already one of the biggest military spenders in the world. In $ billion, the four biggest spenders were: USA (747), China (254), UK (70), Russia (67) [1]. The Russian spend is likely to have increased substantially since 2022. Yet the fact remains that the UK has been a very large spender and as a result has a huge ‘military industrial complex’, to use President Eisenhower’s terminology. Do we need to spend more on defence - or do we need to spend more effectively?

The ‘defence dividend’ and the North West [2]

Sir Keir Starmer has taken the first decision for us. It’s clear that spending is going up, towards 3% of GDP by the next Parliament, and in the medium-term possibly more. The issues now should be: how we procure more cost effectively; how increased defence spending can strengthen the national economy; and whether it can help rebuild the North’s economy, where, for all its problems, there exist critical national concentrations of skills and assets in aerospace, computer games technology, missile systems, autonomous aircraft, the nuclear sector, vehicles, military shipbuilding and repair, and submarines. Sometimes these are located in places with serious social problems, misleadingly labelled as ‘post-industrial towns’ – places like Barrow, Bolton, Birkenhead, Whitehaven, and Broughton, near Chester. With the exception of the concentrations of defence expertise in West Cumbria (related to the nuclear industry and nuclear submarines) and near Blackburn (aerospace) the skills and assets are concentrated in or near the ‘Northern Arc’, previously identified by this author [3], comprising South Manchester, North Cheshire and South Liverpool.

Barrow is the base for UK nuclear submarine construction (hence mini nuclear reactor technology); Broughton has Airbus; Bolton is a base for MBDA, joint Anglo French missiles systems technology; Birkenhead has the Cammell Laird shipyard with long term naval contracts; Whitehaven has the nuclear and nuclear waste industry at Sellafield; Samlesbury near Blackburn has been the base for Taranis, the UK’s autonomous aircraft project. All this is a hugely significant resource and at least as important as the high profile OxCam (Oxford Cambridge) Arc.

Economic restructuring and military spending

We know the power of military-related spending to restructure the economy. The internet was born from expenditure by a US government defence spending agency, the Defence Advanced Research Projects Agency (DARPA), the microcomputer took shape because it was needed on the moonshot (born of the missile arms race), and money was thrown at Fairchild to build a reliable microprocessor [4].

The restructuring of the USA’s Southern states was driven by wartime expenditure. Government funded plants transformed the economy of the American South, as the recipient of military bases, shipyards, ordnance factories, chemical and petroleum plants and transport facilities, laying the basis for post war economic expansion in this poor region [5]. All this culminated in a Southern belt of military driven investment, memorably described by the geographer Peter Hall and his colleagues as ‘The Rise of the Gun Belt’ [6]. The geography of defence and defence procurement shows a very considerable bias to the South in the UK, caused by historical inertia and the importance of personal connections with the MoD and its research arms for securing contracts [7].

Could we try to replicate the wartime and postwar US experience, especially in the Northern Arc?  There appear to be four key opportunities.

Four opportunities

The first is reviewing the location of our defence research institutions, which were anchors for research contracts such as the Defence Research Establishments in the 1980s. Scotland, the North and Midlands retain the capacity for building military platforms like aircraft and warships. The South of England has seen the bulk of the research-led innovation and a major explanation for that was the pull of the Ministry of Defence and historic location of the DREs [8] in the M4 corridor. Some of these establishments were merged in 1991 to form the Defence Research Agency. More were added to DRA in 1995, to form the Defence Evaluation and Research Agency. DERA was split up in the early 2000s, with the major part privatised, becoming known as QinetiQ, and the more sensitive parts retained by government. The facilities remain in the South. Perhaps there is a case for some ‘re-nationalisation’ in this sector, if only to ensure that world beating defence innovations are not secured by predators.

Do these institutions all need to stay in the South? The recent decision to move a substantial part of GCHQ’s activity to Manchester suggests that there are real advantages (not least in terms of young highly qualified recruitment) to be had from moving out of the South.

Much of the future of war may lie in espionage and cyber warfare, where the skill base is related to computer gaming technology. There are sizeable ‘games city clusters’ in Northern cities (as well as South) including Manchester, Liverpool, Bristol, Sheffield, Nottingham and Leeds [9]. The biggest clusters of gaming industry firms outside London include Manchester (75), Brighton (72), Guildford (71), Slough (63), Cambridge (45), Bristol (42), Sheffield (38), Leamington Spa (36), Edinburgh (30), Nottingham and Leeds (26 each). Liverpool Riverside is in the top ten list of Parliamentary constituencies with a strong games sector.

Second is the case for focusing increases in defence spending on research and innovation such as cyber warfare, rather than hard infrastructure. History shows that military spending is a hugely powerful driver of innovation, in part because government seems happy to throw money at a military research problem in a way that rarely seems acceptable for civil R&D. Defence related research undertaken in partnership with universities could be a powerful driver for economic growth.

Third is an important corollary. If we targeted much of the increased defence spend at innovation and research, could we bias the research projects to the North, especially in research partnerships with key Northern universities and businesses? A new North West defence research institution, perhaps in Manchester, would be attractive especially if it had a wider role, connecting researchers at other Northern universities such as Sheffield, (engineering), UCLAN (nuclear) and Liverpool, aligning research expertise. The argument for locating such a facility in the North West is not simply that it could draw on the skill pool and technology base in several established defence-related assets. It is also that locating the facility in the South could draw research skills away from established and nationally significant areas of expertise, including life sciences.

Fourth comes the basic geography of defence. Partly for reasons of historical inertia, our main military bases and institutions, almost without exception, are located in the South [10]. Alongside Whitehall, MI6, MI5 and the Ministry of Defence, the long list includes: Army HQ at Aldershot and Salisbury Plain; the Navy bases at Portsmouth and Devonport; the host of RAF bases in East Anglia and Lincolnshire; and the Royal Aircraft Establishment (as it was) at Farnborough. The locations have hardly changed since the war.

When he was Secretary of State for Defence in the 1980s, Michael (now Lord) Heseltine hoped to encourage some of the bases to head North, taking inflationary pressures off the South, releasing land for development and strengthening the North’s economy. The military stood their ground and Heseltine lost that battle. But the issue has intensified. In an age where more of the UK’s potential adversaries are acquiring long range and hypersonic missiles (with nuclear or conventional warheads) it must make good strategic sense to disperse our military assets, just as we did in the 1930s with the dispersal of aircraft production to shadow factories in the North.

Conclusions: the demand for military production

Although this  discussion opened with Adam Smith’s view that military expenditure was unproductive it has not taken a view on the desirability or practicability of significantly increased UK defence expenditure. It has simply explored the possibilities for economic growth, especially in the ‘Northern Arc’, on the assumption that the Prime Minister’s objective will be delivered. This is far from certain, given currently anaemic economic growth, alongside high levels of demand for social welfare in an ageing society with high levels of social inequality.

Nonetheless the demand from other European nations which have spent much less than the UK on defence seems more securely based. Thus, the economic opportunities extend beyond domestic markets. If Europe needs to increase its military spending across the board, whilst diversifying away from reliance on the USA as an equipment supplier, there could be significant long term economic and strategic opportunities. It seems immoral to suggest that war is good for business. Unfortunately, in the world as it is today, that appears to be inescapable.

Ian Wray is honorary professor at Liverpool University’s Heseltine Institute, professorial fellow at Manchester University’s Planning School and the author of No Little Plans: How Government Built America’s Wealth and Infrastructure. He was Chief Planner, Northwest Development Agency 2000-2010 and lead author for the Northwest’s first Regional Economic Strategy in 1999.

[1] Foreign Affairs, Vol 102 No 3, May/June 2023 p. 80

[2] Whilst this paper has focused on the North West (perhaps the northern region with the greatest potential for harnessing the ‘defence dividend’), the manufacturing and skills capacities of the North of England as a whole (especially the cities of Leeds, Derby and Sheffield) also need assessment.

[3] Ian Wray, The Case for the Northern Arc, February 2025, Heseltine Institute 

[4] Ian Wray, No Little Plans: How Government Built America’s Wealth and Infrastructure, 2019. See Chapters 7, 10 and 11

[5] P. Koistinen, Arsenal of World War II: The Political Economy of American Warfare, 1940-1945, 2004

[6] Ann Markusen, Peter Hall, Scott Campbell, Sabrina Deitrick, The Rise of the Gun Belt: The Military Remapping  of Industrial America, 1991

[7] Ministry of Defence, UK Defence in Numbers 2023

[8] Peter Hall, Michael Breheny, Ronald McQuaid, Douglas Hart, Western Sunrise: The Genesis and Growth of Britain's Major High Tech Corridor, 1987

[9] UKIE, UK Games Map, 2023

[10] Steve Fothergill and Jill Vincent, The State of the Nation, 1985. The map in this study shows the distribution of bases overwhelmingly biased to the South. It is unlikely to have changed since the 1980s