The City’s defence contractors are rubbing their hands as Whitehall rushes to secure the bottom of the ocean. A British-led coalition, partnered with the United States and Australia, has announced a sprint to develop underwater drone supremacy. The programme, dubbed ‘AUKUS Undersea Dominance’, promises to pour billions of pounds into autonomous submersibles capable of patrols, surveillance, and potential combat beneath the waves.
For those of us who watch the defence budget with a sceptical eye, this smells of an expensive arms race. The logic is sound: the world’s fibre optic cables, offshore energy assets, and military secrets lie vulnerable on the seabed. But the price tag will be enormous. The Treasury will be asked to sign a blank cheque for a race that, like the Cold War, has no finish line. Markets will cheer the news for BAE Systems and Rolls-Royce, but the long-term bond market will squint at the borrowing.
The strategic imperative is clear. China has invested heavily in its own underwater fleet, and the West cannot afford to be outflanked. But one must ask: will this spending crowd out more efficient investments? The government’s fiscal discipline is already under question, with gilt yields sensitive to every hint of spending. Capital flight is a real risk if investors sense a return to profligacy.
Still, for the companies involved, this is a bonanza. Underwater drones are the new fighter jets. They are cheaper to produce, less risky to operate, and far more versatile. The coalition’s plan to share technology and standardise interfaces is a rare example of sensible procurement. If they can avoid the typical cost overruns and delays, this might actually deliver value for money. But don't hold your breath.
Inflationary pressures are another concern. Pouring billions into defence contracts in a labour market already tight will do nothing to cool prices. The Bank of England will watch nervously. If this spending is monetised, expect a further weakening of the pound and a rise in long-term bond yields. The bottom line is this: the UK must lead in this domain, but it must do so without fracturing its already strained fiscal position.
The question remains: who pays? The answer, as ever, will be the taxpayer. But if the coalition can demonstrate that this investment prevents a far costlier conflict, the markets might just forgive the debt. Proceed with caution, but proceed we must.
