The current headlines of armed forces job cuts may not inspire confidence in the modern day defence industry but the military has always been at its most innovative and resilient and discovered its greatest strengths during times of trouble.

There are problems with the austerity budget – Committee of Public Accounts (PAC) chair Margaret Hodge has warned of the dangers of tight purses, such as late deliveries and cannibalised equipment: truly the stuff of procurement nightmares.

In the six months to the end of November 2010, 40% of deliveries by the Ministry of Defence (MOD) to frontline soldiers were late by 30 days or more, according to findings by PAC.

As the defence sector currently contributes over £35 billion per year to the UK economy and employs around 300,000 people, it’s vital the future of the industry is protected.

Sorting out these issues will take time and ingenuity, the kind of ingenuity found in the thousands of UK SMEs who support and help develop the defence industry every year.

In her 2010 report More bang for the buck – How we can get better value from the defence budget, financial analyst Antonia Cox says the MOD should be far more challenging towards its main contractors and the SME sector can potentially provide more innovation and better value for money.

It’s been said many times that SMEs are the backbone of the industry and it’s well known that every single large aerospace or defence equipment contract is underpinned by the hard work of hundreds of SMEs.

They also have the support of figures like the Minister for Defence Equipment, Support and Technology, Peter Luff,  who controls around 40% of the defence budget and believes SMEs are able to innovate far more creatively than was previously possible because prime contractors are no longer as able to just buy them up.

Luff has cited the successes of companies like Staines-based Intelligent Textiles, which makes use of electronic circuits woven into fabric to reduce soldiers’ dependency on batteries, and Cambridge Design Partnership, which has developed a portable oxygen generator, as examples.

The Government has been censured with regard to their support of the defence industry. A|D|S Chairman Ian Godden has slated Defence Secretary Dr Liam Fox’s ‘closed door’ attitude to domestic industry input and an apparent trend for buying in defence and security capability from abroad.

While Godden has said he recognises the Government faces ‘extremely hard choices’, he believes the key to strengthening against future problems is to invest locally – which means investing in SMEs.

The Government is making moves towards supporting SMEs. Some of the most important incentives for SMEs include:

-          the Enterprise Finance Guarantee Scheme, which will be extended for the next four years, making around £2 billion available to around 6000 viable small firms per year

-          a further £200 million for Enterprise Capital Funds, supporting equity investments in the highest growth potential businesses over four years

-          raising the Entrepreneurs’ Relief rate for Capital Gains Tax from £2 million to £5 million

-          cutting small firms’ Corporation Tax rate to 20p by 2014

-          as a result of the Project Merlin agreement recently struck with the major banks, £190 billion of new credit has been secured in 2011, £76 billion of which will be new lending capacity for SMEs