Context

Supported by the Ministry of Defence (MOD), regional defence and security clusters aim ‘to invigorate the Defence Industrial base by facilitating industry, Academia and government sharing ideas, promoting collaboration and identifying routes to market through exploitation and commercialisation’.

Due to be fully operational by the start of 2024, the North East Regional Defence and Security Cluster will fulfil these functions for the North East region. A Steering Group is currently developing the cluster’s value proposition and membership model. The Steering Group is support by a wider advisory group consisting of SMEs, Primes, regional bodies and academia. 

This evidence base has been developed by the North East Local Enterprise Partnership (North East LEP) in support of the launch of the North East cluster, providing the cluster members with an up to date understanding of the existing evidence on the economic impact of defence and security in the North East region. The evidence in this cluster was generated in July and August 2023 in support of the cluster launch and was up to date at that point.

This evidence can be used by regional and national business and policy makers to understand the current strengths and opportunities related to defence and security in the region.

Defining defence and security 

Like many industries defining defence and security precisely can be challenging. For the purposes of our evidence base we have followed the definitions used in the 2021 defence and security industrial strategy published by the UK government. This strategy notes that defence and security are distinct industries with different business bases. However, both sectors are shaped heavily by public sector procurement and have significant overlaps in terms of technology and purpose.

The defence industry consists of a relatively small number of large manufacturing enterprises. The Ministry of Defence is typically the largest customer of these firms (and often the only customer due to restrictions on selling military and dual use equipment elsewhere). These firms are engaged in complex manufacturing and research in relation to defence equipment, goods and related services.

The security sector by contrast largely consists of small to medium sized firms offering a range of security services. The breadth of these services is broad, with the defence and security industrial strategy taking these to cover critical national infrastructure protection, cyber security, policing and counterterrorism, major event security, border security, offender management, and services including consultancy, training, guarding and risk analysis. It has a much broader customer base than the defence industry although the public sector is still one of the largest customers.

To operationalise these definitions for our data analysis at the North East LEP we have identified a subset of Standard Industrial Classification (SIC) codes closely aligned with these definitions. These cover both the defence and security side of the industry and allow the analysis of the most detailed ONS sources.

SIC codes come with limitations however, as they do not always accurately describe the activities of firms that are registered under them. Recognising this we have analysed a much wider range of related data than just the business base in the North East defence and security sector, including for instance the MOD’s recorded spend and supported employment with industry. We have also used the innovative Data City platform, which uses firm’s self-described activities on their website to classify firms on their websites, to provide a broader perspective. 

The data and evidence in this evidence base has been collected at the level of the North East region, coving the 12 local authority areas from Northumberland to Redcar and Cleveland. This geography was chosen to reflect that of the North East defence and security cluster. Because the North East LEP typically publishes data at the LA7 level, which does not include the Tees Valley local authorities, some of the data in this evidence base may not match exactly the data published elsewhere on the North East Evidence Hub. Tees Valley specific evidence and activity can be found on the Tees Valley Combined Authority website.

Defence, security and economic growth 

Discussions about the basis for and impact of defence and security spending have a long history in economics. Adam Smith, generally taken to be the founder of economics as an academic discipline, discusses defences and security at some length in the ‘The Wealth of Nations’ ^[1]. Here he argues that it is one of the proper uses of government taxation to ensure the security of the nation, as well as touching on many concepts which are still central to debates on the level and character of this spending today, such as the professionalisation of standing armies and defence inflation.

The traditional economic view of the impact of defence spending accepts the legitimacy claims of Smith but subsequently argues that total defence spending should be as small as possible. Essentially this is because, once security is ensured, every subsequent pound of expenditure on defence is expenditure that could have been spent on other public services with a more direct benefit for the population^[2]. I.e., there is a trade-off between ‘guns and butter’. The economic experiences of nations like the Soviet Union that focused on military spending to the expense of other public services and economic growth support the idea that there are trade offs between security and other goods.

The great unknown in this debate is the level necessary to ensure security. If security does break down and lead to armed conflict, as we are now seeing in Ukraine, the economic costs are likely to be catastrophic. The world bank estimates that the Russian invasion caused a 29.2% decrease in Ukraine GDP in 2022^[3]. 

More broadly the notion of feeling safe and secure is an essential component of economic life. Businesses will not invest or hire, and consumers will not make purchases, if they do not feel that they live in a state of safety, whether that be from military threats or on a personal level feel threatened by crime, violence or other instability. The question of the ‘right level’ of spending is therefore a nuanced and probably incalculable reference point.

These larger questions are beyond the scope of this evidence base. Instead, it aims to analyse the direct economic data and evidence on the size, scope and impact of defence and security spending in the North East region. 
   

MOD expenditure and deployments 

This section examines the direct expenditure by the MOD on contracts with industry and commerce, the supported employments resulting from these contracts and the recruitment activities of the MOD in the North East region. It focusses on the aspects of MOD expenditure most relevant from a regional economic perspective, rather than trying to analyse the total impact of defence expenditure.

Spend with industry  

Defence expenditure is a significant proportion of both the UK economy and UK public expenditure. In 2021/22 the UK spent £45.9 billion on defence, 2.1% of total Gross Domestic Product and therefore one percentage point higher than the NATO defence spending target^[1]. Defence spending accounted for 5.9% of total government expenditure in the same year^[2]. 

Total UK expenditure on defence has seen a variety of fluctuations in size throughout history. These have often been in response to deployments by the UK government. Following a period of gradually declining budgets in real terms since 2013/14, the UK government has committed to again increasing expenditure following the illegal Russian invasion of Ukraine. The spring budget in 2023 committed to an increase of £5 billion over the next two years^[1].

Of the total defence expenditure around 46% is spent on contracts with industry and commerce, and breakdowns of this expenditure by region are available from the 2013/14 reporting period. The North East received 0.8% of the total MOD spend with commerce in 2021/22 and 0.9% of the spending in England. This is a lower proportion than the North East’s share of the UK population, and as can be seen from the chart below total defence expenditure with industry in the region has fallen significantly since 2013/14. Total expenditure in the region was 46% lower in 2021/22 compared to 2013/14. Over the same period spending in England declined by 7 %. This suggests that North East firms are either not bidding for, not winning or winning smaller contracts with the MOD than previously and other regions.

The character of this expenditure in the North East region differs from the national spending in two main ways. Firstly, a much higher proportion of the expenditure was with SMEs, which may reflect the size of the business base and explain the relatively low expenditure in the North East. In addition, the expenditure was heavily concentrated on firms in the computing sector compared to other regions. 42% of the total expenditure in 2021/22 was on this sector a far higher than the percentage for the next most concentrated region (the South West on 8%).

MOD supported employment

In addition to their data on spending with industry and commerce, the MOD also releases estimates of the number of jobs supported by this expenditure. The MOD’s expenditure supported over 112,000 jobs in England in 2021/22, with the total number of jobs supported increasing by 1% since 2013/14. However, only 0.8% of these job in 2020/21 were in the North East and the region has the lowest number of jobs supported through MOD expenditure per working age resident. The number of jobs supported through direct MOD expenditure have declined in the North East by 47% since 2013/14, reflecting the decline in MOD spending with industry over the same period.  

As was highlighted above MOD expenditure with industry and commerce in the North East is disproportionately spent on contracts with SMEs. This is likely a partial explanation for the relatively small number of jobs supported in the region (even accounting for the level of spending). Supported employment in the North East is concentrated in the computing sector, which accounted for 300 of the 900 employments in the region in 2021/22.
 

Military intake and deployments

Beyond expenditure and supported employments the other major impact of MOD activities on the regional economy is direct employment. The MOD publishes data on the uniformed intake of the services at the parliamentary constituency level (which have been aggregated here into regional figures). There is also regional data on the deployment of both uniformed and non-uniformed employees. This allows us to analyse the number of North East residents finding employment with the MOD.

This data shows that the North East contributes a disproportionate share of the intake to the uniformed services, accounting for 7.3% of the England total intake in 2022 despite accounting for only 4.6% of the working age population in England. The North East had the highest intake in the country per head in 2022 with only the South West having a comparable intake, and several constituencies in the region are amongst those with the highest rates of adults joining the forces.

This is likely reflective of a history of participation in the services in the region and a more rural character to the region’s geography (intake from urban constituencies tends to be very low). Weaker local labour markets and qualifications in the region may also be a factor, with adults having fewer alternative employment options.  

While the North East is a strong base for recruitment into the forces, a very small proportion of personnel are stationed in the region while in service. Only 0.8% of MOD employees stationed in England were stationed in the North East in 2022, a proportion that has been relatively constant since 2013. This includes both military and civilian personnel. 

There are a few differences in the character of the deployments in the region compared to the England average. Less than 1% of the military personal in the region are in the royal navy or royal marines, compared to 22% of those stationed in England. In addition, a smaller proportion of the deployments in the North East are civilians. Only 16% of those based in the North East were civilian employees compared to 27% of those stationed in England. The region does have a much higher proportion of industry based civilian personnel. 

The evidence suggests that after their service a majority of those who served in the forces from the North East return to the region. While there is no explicit data on location of employment by region after leaving the MOD, we can make inferences from where properties are purchased using the forces help to buy scheme. 8% of total forces help to buy expenditure in England was spent of properties in the North East region. This proportion is more aligned with the intake data than the employment data, which strongly suggests that most MOD employees from the North East return to the region after their services.

The MOD, therefore, while making a relatively small contribution to direct employment in the region, has a disproportionate role in the upskilling of residents in the North East as residents are more likely than average to have previously served in the armed forces. This role is discussed in greater detail in section 8.
 

Core business base

This section analyses the core business and employment base of the defence and security sector in the North East region. There are two principal sources for this analysis. The first is the ONS business register and employment survey, which classifies firms and enterprises based on the standard industrial classification code (SIC) they are registered under. The second is the Data City platform, which uses machine learning to classify firms based on how they describe themselves on their websites. 

Businesses and employments 

Using a SIC code approach suggests there is a relatively small core defence and security sector in the North East region. 290 private sector businesses were registered in the region under our definition in 2022, 2.7% of the total number of businesses in this sector in England.  

The business base has been shrinking slightly over time. In 2015 there were 345 businesses that were classified as defence and security in the region, meaning that the total business base has declined by 16% since 2015. In contrast the total number of businesses in this sector in England grew by 20%. The decline in businesses in the North East has likely been driven by the fall in MOD spending in the region due to the MOD's role as the major customer in this sector.

Most of the businesses in the sector in the region were in the ‘security’ side of defence and security, with 57% being private security companies and 30% involved in security systems service activities. Relatively few were in the manufacturing subsector, although it should be noted not all manufacturers will have selected these SIC codes as their primary sector.This sector breakdown is typical across the English regions. Only the South West has a significant proportion of its business base operating in the manufacturing sector within defence and security.

The core defence and security employment data mirrors the business data. In total 8,000 people were employed in the defence and security sector in the North East region in 2021. This was approximately the same number as in 2015 (with rounding from the ONS potentially hiding smaller changes). Over the same period employment in the sector in England grew by 2%.

Security was the main sector of employment, with private security firms accounting for half the total employment in the region. However, manufacturing, and in particular the manufacturing of air and spacecraft, ships, and weapons and ammunition do also make a significant contribution to regional employment, accounting for 24% of the total. This is reflective of the fact that while the business base is small many manufacturing firms in this sector are large employers. 

Under this definition only a small proportion of North East region employment is in the defence and security sector. The sector accounted for 0.7% of employment in the region in 2021, the lowest proportion of any region apart from Yorkshire and the Humber.
 

Data City results 

An alternative way of identifying firms in the defence and security sector is the Data City platform which uses machine learning to classify firms based on how they describe themselves on their websites. This includes the ability to create custom datasets of firms based off an initial training set. As the Data City does not have a pre-defined defence and security classification, we decided to create our own using this training capability. 

Our initial dataset consisted of the firms within the North East defence and security cluster, which we then supplemented with further examples of firms in the sector from the MOD contracts list. After the initial sweep of data resulted in a very broad list of firms, we identified firms that were clearly mistaken attributions which allowed the algorithm to retrain itself and come to a more effective subset.

A further benefit of the Data City platform is that also scrapes company websites for additional branch locations. This is especially useful in the North East context as there is a large branch economy, many firms are registered outside the region despite having a large presence here. 

In total the Data City platform identified 1,443 firms in the defence and security sector with a location in the North East of England. It was estimated that these firms have a total employment of 47,907 in the North East as well as a regional turnover of almost £14 billion. More than half of these firms were registered outside the North East of England. If only firms with a registered address are considered, there were 595 in this dataset with an estimated 15,810 regional employees and a regional turnover of just under £5 billion.

Within the North East some local authorities had a greater concentration of firms in this sector than the national average. All the local authorities in the Tees Valley except Darlington had location quotient above 2 (which indicates a concentration of firms in this sector twice as high as the national average). Sunderland was the only local authority in the North East region which had a below average concentration of firms in this sector.   

One of the other advantages of the Data City platform is that its sector classification will classify firms into multiple sectors if appropriate. The range of additional sectors which firms in the defence and security cluster are classified in demonstrates the strong links between the capabilities in this sector and related growth opportunities in the North East. 

There is significant crossover with firms across advanced manufacturing, energy and digital technologies. This includes subsectors which the North East LEP has identified as significant growth opportunities for the region over the next 10-15 years, such as space technologies, energy generation and life sciences. 

This overlap with other sectors likely explains the mismatch between the Data City results and the SIC results in terms of the concentration of firms in the North East region. While the North East does not have a large defence and security sector per say, it does have a very strong advanced manufacturing sector with related capabilities which is picked up in the Data City analysis. The discrepancy between the Data City results and the SIC results suggests that the manufacturing capability for a defence and security cluster in the region is present, but these firms are not currently operating in the defence and security sector or registered under defence and security SIC codes.

Wider business base 

As was highlighted in the section above, firms in the defence and security sector have considerable overlap with advanced manufacturing, digital tech and Net Zero in the North East region. Further detail on these sectors can be found in our evidence bases on these sectors that can be accessed through the links below.

High skilled workforce and training 

This section analyses the demographics of the veteran population living in the North East region, including their employment outcomes and job quality measures. It highlights the central role that the forces play in the professional development of a significant minority of the North East workforce and how veterans in the region tend to have stronger employment outcomes. It also analyses the skill requirements of jobs in the defence and security sector.

Veteran population in the North East 

Up to date data on the number of veterans living in the North East region is available from the 2021 census. The census shows that 1 in 20 of those aged over 16 in the region had previously served in the regular of reserve forces, just under 110,000 adults in total. The region has the highest proportion of its adult population having previously served in the UK. 

Almost half the veterans in the North East are over the age of 65 (as is the case nationally). This is due to participation rates in the forces being much higher when these adults were just entering the workforce. Because the North East region has an older profile overall, to some extent this proportion reflects the demographic profile of the region. 

In terms of working age adults 3.6% in the North East region have previously served in either the regular or the reserve forces. As can be seen from the data below working age veterans are generally still concentrated in the higher end of the working age category. They are much more likely to be male than the female, with only 13% of veterans living in the North East being female. They are also less likely to be an ethnic minority, with 98% of veterans being white British compared to 91% of those who had not served in the forces. The age and demographic profile of veterans are both important considerations when considering their employment outcomes. 
 

Employment outcomes for veteran’s personnel 

The data suggests that working age veterans in the North East are more likely to be in employment than average. 77% of those of a working age with some experience in the forces were classed as in employment in 2021, compared to 72% of those without any experience in the forces. Females who had served were much more likely to be in employment than those who had not. 76% of working age female veterans were employment compared to only 70% of those who had not served in the forces.

In terms of their occupations however, veterans in the North East are slightly less likely to find employment in ‘better jobs’ occupations. 40.3% of those in employment in the North east who have not previously served in the force were employed in better jobs occupations according to the census, compared to only 39% of those who had some experience in the forces and 37.7% of those who had served in the regular forces. 

There is a nuance with regards to gender in this data. Female veterans have much strong occupational outcomes than the non-ex-service occupations, with 46.5% finding employment in better jobs compared to 40.3% of female in employment overall. They are much more likely to be working as health professionals, which perhaps suggests that medics are overrepresented amongst servicewomen. In contrast only 37.7% of males in the North East found employment in better jobs occupations. Male veterans were heavily overrepresented in transport and mobile machine drivers and operatives.

This is reflected in the general sectors in which ex-service personal find employment. Male veterans in the North East are almost two times as likely to find employment in the transportation sector. They are also slightly over represented in public administration and defence, which may reflect employment in the police.They are underrepresented in accommodation and food services and retail. 

Female veterans are also underrepresented in accommodation and retail, and overrepresented in human health and social work. Almost of third of female veterans in the North East work in this sector. 

The occupational outcomes of veterans in the North East are worse than those in England overall for both genders, which probably reflects how there are generally fewer professional level jobs in the North East region compared to the national average.

It should be noted that charities such as the Royal British Legion highlight that veterans have a variety of experiences when trying to access employment opportunities after their service, even if the data above suggests that veterans have relatively strong employment outcomes overall^[1]. Many ex-services personnel face challenges in terms of educational attainment, navigating the civilian world of work and sometimes stereotypes about the forces and their training. Not all ex-service personal face these issues equally, and the Royal British Legion highlight issues for early service leaders, ethnic minorities, and females in particular. Despite the strong employment data outlined above this is not a universal experience for those leaving the forces and those that do struggle tend to have poor post services employment outcomes. 

Job quality measures 

Beyond employment outcomes for ex-service personnel, there is also the question of to what extent are the jobs in the defence and security sector themselves high quality jobs. There is no ONS data sufficiently granular to answer this question in the North East, but the Data City generated list discussed earlier can provided an indication through the matching of job adverts to the firms in the training set via Lightcast. 

6369 online job adverts were recorded by the firms in the training set with a least one location in the North East region over the last two years. These adverts suggest that the jobs within the sector are generally high quality. 64% were classified as belonging to SOC codes 1-3, meaning that they meet the North East LEP’s definition of ‘better jobs’, defined as professional and managerial occupations.

The most common occupations advertised by firms in the sector were clearly orientated towards engineering and digital technologies. This highlighting the advanced manufacturing and digital capabilities within the sector, but also that the sector needs a highly skilled workforce with engineering and digital skills to meet its growth potential. Job adverts containing engineering and digital specialist skills were amongst those with the longest advertising periods, suggesting that there is a shortage of skills in these areas. 
 

R&D and innovation 

This section analyses the role of the MOD and the defence and security sector in research and development and innovation, covering the overall contribution of the MOD to research and development expenditure in the UK before looking at the data available on innovation in North East firms. It also covers the infrastructure available to support innovation in the sector in the North East region

Research and development expenditure  

Nationally the MOD is one of the major sources of Research and Development (R&D) expenditure in the UK. In total in the latest year for which data is available, the MOD spent £1.18 billion on research and £740 million on development. Both figures were significant increases from two years before, although the time series of comparable data is relatively small due to breaks in the methodology.

For context, the ONS estimated that total R&D expenditure in the UK in 2021 was approximately £66.2 billion, which would mean that the MOD was responsible for around 2.9% of the total expenditure on R&D. There is no regional breakdown of R&D expenditure available.

There is also evidence that the private defence and security sector is a significant contributor to R&D in the North East. Firms identified as belonging to the sector by the Data City platform have won £563 million in Innovate UK funding since 2002, which accounts for approximately 43% of Innovate UK funding in the region over the same period. More broadly data from research and development tax credits suggest that the three sectors with the greatest rate of research and development tax credits claims and expenditure in the region are manufacturing, information technologies and professional and research activities, the three sectors most closely associated with the defence and security sector.

This is significant because research and development expenditure is an important driver of economic growth. It is often the discovery and commercialisation of new ideas and technologies that lead to productivity improvements. The potential benefits of the diffusion of research from the defence and security sector are discussed in greater detail in the next section.

Research excellence and STEM  

The North East region has considerable innovation capacity and research expertise to further promote innovation in defence and security, and therefore create the conditions for future sector growth. The region’s five universities have a range of research strengths across physical sciences, computing, and chemistry. Over half of the engineering research in all five regional universities was classed as either world leading or internationally excellent in terms of its originality, significance, and rigour in the latest research excellence framework.

The five regional universities also ensure that the region has a highly skilled workforce and with expertise in physical and related sciences. In 2021/22 there were over 20,000 students studying STEM subjects in North East universities (Biology, Physical sciences, Mathematics and Engineering) and a further 8,000 in computing. Most students studying in the region remain in the North East for work bringing their skills to local businesses and employers. 

Wider impact

This section considers the more diffuse economic benefits of defence and security spending, and particular the potential diffusion of military technology into other sectors and how the sector can be a source of global influence for the UK and North East. It concludes there are opportunities for the North East, but these must be balanced against potential trade offs and risks.

Further evidence