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During the domestic political pandemonium last week it was almost possible to forget we are in the middle of the most serious threat to peace and security in Europe for forty years. We were talking about Keir Starmer's enemies in the Labour party, not the security threats we face as a country.
This weekend's Munich Security Conference forced a recalibration of the real threats the UK faces. Incorrigibly, agitators for a change in the Labour leadership were still at it over the weekend briefing that given world events, the defence secretary would be a reassuring Keir replacement for other leaders looking on aghast at yet another new UK prime minister. Most of us -- suspecting Starmer safe until at least the end of February or May -- were just focusing on world events.
In Munich, the prime minister tried to focus on the job in hand and called on European nations to step up defence spending so they were no longer reliant on the US. "We must build our hard power because that is the currency of the age," he said.
And that seems to apply to the UK itself. The BBC reports on what seems inevitable: under pressure from defence chiefs and allies alike, Starmer is looking at a "significant increase" in military spending. The current plans commit him to going to 2.5% by 2027 but, running to almost stand still, this nonetheless leaves us with a £28 billion blackhole that has seen some over the last few months call for savings elsewhere, including in welfare.
When the prime minister announced this first plan, we at the Readout immediately wrote that it wasn't going to be enough. Even despite Starmer pledging to raise spending to 3% by the end of the decade, then hitting the new NATO target of 3.5% by 2035, these numbers were too mañana.
The first problem with only going to 2.5% is that this only plugs the shortfall for funding programmes which have already been announced. And given the UK has a nuclear deterrent, a much larger amount of our defence budget goes on that than other nations (excluding France, and next month they're expecting a major speech by Emmanuel Macron setting out how their nuclear fleet -- the gloriously named force de dissuasion -- will start covering other European nations).
Right now Whitehall is shaking the tree trying to find the cash to cover a Defence Investment Plan. It's no wonder the prime minister is feeling the need to find a bigger tree.
This weekend, US Secretary of State Marco Rubio's tone in Munich may have been more conciliatory than JD Vance's aggressive speech at the same conference 12 months ago, but the message remains: you've got to defend yourselves first, before expecting back up. "The end of the transatlantic era is neither our goal nor our wish...We will always be a child of Europe," Rubio told the audience. "We in America have no interest in being polite and orderly caretakers of the West's managed decline."
So, even though it was delivered more silkily than Vance, the message remains the same -- Europe must at least try to defend itself.
Draping himself in khaki is one way for Starmer to find some protection; as he says, this is after all the currency of the age. But how can he pay for it? While the City was reassured that the chancellor ensured her last Budget had more headroom than previous efforts, independent forecasters are already warning that this too is receding.
Reeves will be encouraged by this Will Standring piece that shows Goldman Sachs predicting that government borrowing costs will fall to the lowest levels since 2024. They judge that disinflation will allow the Bank of England to cut rates. With this "outweighing any nerves caused by political risks," it will push gilt yields lower.
A slew of data points out this week including Wednesday's inflation data for January may help the BOE to see their way to this: by April, cuts to energy bills announced by the government last year will take effect; water bills won't rise by as much as they did last year; and other one off hikes like VAT on school fees will drop out of the numbers. The BOE itself expects CPI to drop to 2% by April.
This is all pretty positive. As our reporter Philip Aldrick points out, this could mean the chancellor will have a windfall from the falling cost of the UK's debt-interest payments for the first time since she became chancellor in July 2024. At every other one of the chancellor's previous fiscal events, higher debt interest has undermined her but, in March, "debt interest is likely to be a tailwind, for once."
But even so, enough to plug the defence hole? Unlikely. To boost defence spending first time round, Starmer raided the aid budget. There isn't much left there.
Growth remains elusive, and as Philip also points out in this piece here, getting closer to the EU -- which Reeves spoke about in a speech last week and Starmer reiterated in Munich -- may well require abandoning her effort to speed up house building and construction.
So the choice for Starmer is, would he rather raise taxes again to boost defence spending -- or further alienate the parliamentary Labour party, strengthened even further by events of the last seven days, by once more attempting to cut something like welfare to pay for it? Hard power may now be the "only currency," but it remains very hard to pay for.
What just happened
The stories you need to know about this evening
- Markets Today: Wait-and-see
There's been a bit of a wait-and-see mood in markets today, both as traders hit pause during market holidays in Asia and the US and as they await crucial UK economic data this week. - Inflation data due on Wednesday will be the last we see before the BOE meets next month, making it critical to its view on the appropriate next steps for monetary policy. Economists expect inflation to have eased to 3% in January, while officials have forecast it a little lower.
- And tomorrow's jobs data will also be important. Wage growth is forecast to have slowed to 4.6%, adding further reassurance that price pressures are receding.
- Gilt yields have been falling today, particularly at the longer end of the curve, as the nose of political risk abates and markets respond to Friday's benign US inflation data on Friday, but further movement may have to wait for more evidence on the UK economy.