By Anna Dereka
February 2025 will mark the third anniversary of Russia’s full-scale invasion of Ukraine, and in turn, three years of the UK as one of Ukraine’s biggest aid donors. Since the beginning of the war, the UK has committed £12.8 billion to Ukraine. On top of this, last month the British Defence Secretary John Healey outlined an additional loan of £2.26bn, taken from frozen Russian assets. So far, Britain’s financial assistance has spanned humanitarian, military, reconstruction, energy and other sectors, with a total aid of £2.3 billion in 2023. As part of the UK’s total expenditure, Departmental Expenditure Limits (DEL) run up to £479 billion (2022-2023), which makes the aid to Ukraine a relatively small proportion of the UK’s budget. Nevertheless, it continues to significantly affect the UK’s economy and contributes to various economic challenges.
The primary challenge facing the economy is the increased pressure on rising debt through increased defence spending. The military support of Ukraine largely involves sending ammunition and military equipment, such as artillery and missile range, tanks, drones and armoured vehicles, which effectively means that the UK relies on its stockpile. By early2024, the UK stockpile was almost exhausted, according to The Times. As a result, the UK’s Ministry of Defence must replenish its military equipment, a point stressed by former Chief of the General Staff, Patrick Sanders, who highlighted its critical importance in preventing the possibility of a future war between the UK and Russia. Based on Autumn’s National Audit Office Report, the spending required to restore the UK’s stockpile, therefore equals £2.71 billion (whereas the current value of depreciated equipment that was aided to Ukraine only runs up to £171.5 million).
The government would be able to fund the replenishment through the tax revenue, however, in 2023/24, Britain’s spending was higher than the revenue, creating a fiscal deficit. Total revenue from tax was lower than the total spending, forcing the government to borrow, adding £120 billion to the already existing budget deficit that had reached £2.8 trillion. This is very likely to have negative consequences, the main being increasing interest payments for the UK government, as public debt increases and the government is required to allocate more of its spending to debt payments. This could have a negative effect on public services as there will be less funds available for other sectors of government expenditure (in 2024 the debt repayment is expected to be 7.3% of the total spending). The opportunity cost that arises from debt repayment may be evident in less spending on the National Health Service (NHS), which may limit its capacity to address the current demographic and cost pressures, as well as to enhance service quality through investment in essential equipment and staffing. Moreover, the higher interest payments may affect the availability of funds for benefits provision, such as those that support low-income families following the rising cost of living crisis.
Another trade-off that the UK’s economy might face following the support to Ukraine is inflationary pressures on military supplies. As one of the largest exporters of arms in the world, the UK already imports a significant amount of raw material and electronics from across the world. Following the increased need to produce new weapons and military vehicles to restore the national stockpile, demand for raw materials will rise. The increased demand will push the prices up, leading to demand-push inflation. This is likely to result in rising costs, which will hence cause the UK government to face budgetary pressures, having a similar impact on the provision of public services, due to the value of spending being increased, while the tax revenue remains the same.
The aid to Ukraine also raises an important question among the members of the public, such as how the UK will be able to deal with the consequences of the support, particularly the rising debt and the issue of its repayment. This concern is mostly driven by the interest of the increased borrowing by the newly elected Labour party led by Keir Starmer which has been recently announced in the Autumn Budget. The Chancellor of the Exchequer, Rachel Reeves has delivered the UK Budget, in which she stated that from 2024/2025 borrowing will be £28 billion higher than forecasted in March 2024. Consequently, government debt as a percentage of GDP is expected to increase from 97.8% in 2023/24 to 98.4% in 2024/25 – and in 2025/26 is expected to be followed by a fall to 97%.
Similarly, the new tax policy includes an increase of 1.2% in the employer’s national insurance contribution and it derives from the need to boost public services funding, the issue of which may have been indirectly contributed to by the aid to Ukraine. This is likely to restrict the employment of workers in certain sectors, as costs for employers increase, decreasing the incentive to hire. Apart from this, the increased insurance payment that falls on employers is most likely to affect the possibility of wage rise for workers, impacting labour productivity. Such a rise results in a rise of funds for the government, allowing it to spend on public services. Although the aid to Ukraine may have had an indirect impact on the decision-making process, the chosen policy had been most likely impacted by other bigger areas of government spending.
However, it is important to recognize that while the aid to Ukraine has presented challenges, it has also proven beneficial for the UK and its economy for several reasons. In addition to securing peace and safety for Europe (as well as the UK itself) and reinforcing the UK’s key role as one of the global leaders in promoting democracy, the support to Ukraine serves as an opportunity for the UK to improve its international treaties, as followed by the post-Brexit change of relations with the EU. Following the UK’s bilateral aid to Ukraine, the UK’s reputation as a partner would boost the incentive of other countries to cooperate with the UK. For instance, the aligned stance of the EU, the UK, and the US regarding the war, as well as their collective support, have already fostered increased collaboration between the US and certain EU nations with the UK. In the long term, this may facilitate the establishment of new trade relationships.
Additionally, the UK’s military support, particularly, the ammunition and weaponry sent to Ukraine is seen as beneficial for the UK’s national defence industry. The challenge of the depleted stockpile and the need for government spending on stockpile replenishment is also viewed as an opportunity to enhance the effectiveness and quality of the UK’s ammunition. This is possible through the ability to send experimental equipment and test its effectiveness, as well as the acquisition of modernised, up-to-date weaponry. As previously noted, the existing stockpile has depreciated, and hence when compared to newly produced defence technologies, may be characterised by a worse quality. Therefore, by sending ammunition to Ukraine, Britain also ensures its national safety. The investment into ammunition also provides jobs in the industry, as this sector would require workers to produce new warfare machinery. In this way, the economy would be boosted as unemployment would reduce, in the long run increasing the tax revenue for the government and resulting in less pressure on the existing debt.
Furthermore, the UK’s aid is crucial to Ukraine, enabling it to fight for its freedom and sovereignty. Not only the military training for Ukrainian soldiers in the UK is significant in influencing the strategic approach to the conflict, but it also enhances the effectiveness of territorial defence. The financial aid that Ukraine has received from the UK has also proven to be integral, given the lack of military equipment that Ukraine faced at the beginning of the war and the issue of which is continuously progressing as its army exhausts munitions to fight for peace. In addition to the military aid, the UK’s humanitarian aid to Ukraine has helped those who have been affected by the war, while a portion of the UK’s funds has been allocated to support the government and stabilise Ukraine’s economy during war times.
Overall, Russia’s war had significantly changed the UK government’s policies addressing defence spending to be able to support Ukraine. The UK’s commitment over the past three years has underscored its role as a key player in international solidarity and humanitarian aid. While the aid represents a small percentage of the UK’s overall budget, its implications are far-reaching, impacting its economic stability. The pressures of increased defence spending and the necessity to replenish military stockpiles have contributed to the existing fiscal deficits, leading to higher public debt that is expected to reach 98.4% of the country’s GDP in 2024/25 and potentially limits funding for public services like the NHS.
Moreover, the UK may face an issue of rising costs on military supplies, also affecting the austerity policy of the economy and impacting potential military shortages. Despite these challenges to the UK’s economy, the assistance to Ukraine provides long-term benefits for the domestic economy and further improves relations with international partners, while also allowing the people of Ukraine to fight for their freedom and protect their territories.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.
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