Give British businesses the right environment to grow

It was the most glamorous careers fair I’d ever been to. Not because of the jobs on offer or the salaries attached but because of the location: 10 Downing Street.

I wasn't the only one to think that either. Among the attendees was defence secretary John Healey, who described the backdrop as the “poshest place for a jobs fair” he had ever seen. It was also a sign of the times.

Britain will be spending 2.5 per cent of its national income on defence within the next couple of years, before heading to 3 per cent in the next parliament. Defence spending was last at this level in the early 1990s. The UK hasn’t spent 5 per cent of its economy on the military and defence since 1968. The peace dividend that emerged after the Cold War has largely gone to fund the NHS as the population ages and gets sicker.

The chancellor Rachel Reeves provided yet another boost in her Spring Statement, with defence spending receiving an extra £2.2bn over the next year. That will help to pay for cutting-edge tech, such as long-range laser weapons and new kit for our armed forces, as well as homes for their families. The money also comes on top of the £2.9bn announced at last October's Budget, taking the overall top-up to £5bn.

But with money tight and the health of the nation only likely to get worse, it begs the question: how are we going to pay for it all?

The answer requires facing a couple of hard truths. As a nation, we have come to expect American taxes and European welfare, but those sums simply don’t add up. As a result, the tax burden is heading to a fresh high under Labour and public spending may be on course to remain permanently above its pre-lockdown peak.

That doesn't mean it needs to stay that way. As I have written in Business Leader previously, I think what we come to expect from the NHS will change dramatically within my lifetime.

But a leaner state just doesn't seem like a realistic aspiration. After all, we've become accustomed to a government that pays our wages when the economy shuts down and our energy bills when Russian President Vladimir Putin triggers a cost-of-living crisis. Rightly or wrongly, the next government will be getting out the chequebook during the next downturn.

But expectations of such a big social safety net combined with very high debt mean taxes will have to go up. It may not be a problem we have to tackle this parliament but getting from 2.5 per cent of GDP on defence to 3 per cent will cost an extra £17.3bn in 2030, according to the Office for Budget Responsibility (OBR), the government’s tax and spending watchdog. That's the equivalent of raising income tax by 2p. There is a reckoning coming.

Of course, there are many opportunities too – and ones that could potentially help us out of a fiscal hole. The likes of BAE Systems and Babcock will no doubt be big winners as orders surge. BAE employs 40,000 people in the UK and has seen its share price climb by a quarter over the past six months in anticipation of higher defence spending.

From BAE flows a supply chain of 9,000 British businesses that all stand to benefit from the government's cash injection. Roughly 70 per cent of defence-related jobs are located outside London and the South East – and most of them are small and medium-sized enterprises.

According to trade group ADS, the UK defence industry directly employs 285,000 people and contributes more than £45bn a year to the economy. Companies such as Sheffield Forgemasters, which made it into Downing Street, are steeped in British history. What better way to level up than to showcase businesses like these?

But let’s get back to basics for a second. Helping to defend the realm is one thing. But there is little a company can do if its owner can’t even open a bank account. High-street lenders have been turning defence companies away because of concerns about “reputational risk” or fears they will fall foul of environmental, social and governance policies.

These companies can also struggle to get loans as the sensitive nature of their businesses rubs up against bank rules that require strict financial crime controls.

For a small business, that financial lifeline can mean the difference between flourishing and folding.

That all means that the Treasury must move faster to unlock the cash needed to help keep Britain safe and get it to the thousands of small and medium-sized firms that will help keep the show on the road. Investing in defence must no longer be seen as unethical. The chancellor should take further steps this summer to signal that money that goes into British companies will be welcomed instead of tied up in unnecessary bureaucracy and compliance.

This government must also think twice before burdening the very businesses that will be supporting the engineers, cybersecurity experts and scientists of the future.

It should be supporting them in their endeavours, not taxing them into oblivion and drowning them in red tape.

Sir Keir Starmer told the audience in Downing Street that he wanted to see "British jobs, British skills and British opportunities” across the country. Such a shift would help to boost both UK growth and those living standards he so badly needs to improve if Labour is to return to power.

We have a brilliant supply chain that can help both the UK and other countries to stay safe for decades to come. This must be supported and promoted.

If done right, we may even be able to grow our way out of trouble. But we must start by going back to basics, admitting hard truths and supporting British businesses with the right environment to grow.