December 5, 2012 11:25 pm

Defence gap of £2bn opens up

The Ministry of Defence may fall short of at least £2bn in its plans to overhaul Britain’s armed forces by 2020 as a result of George Osborne’s Autumn Statement, according to analysis of its budget.

In a development that will be viewed with dismay by service chiefs, who have suffered years of cuts, defence analysts say the chancellor’s plans to reduce the MoD resource budget by 2 per cent in 2014-15 could have severe consequences for the armed forces.

In the Autumn Statement, the chancellor announced that the finances of almost all Whitehall departments would be cut by 1 per cent in 2013-14 and 2 per cent in 2014-15, as the government sought to get public spending under control.

Defence officials were quick to point out that those cuts would not affect the MoD over the next two years because they would be absorbed by reserve funds held by the department.

“Because of exceptional flexibilities agreed with the Treasury, these reductions can be absorbed without impacting on planned military manpower totals or the core defence equipment programme in 2013-14 and 2014-15,” the MoD said in a statement.

Philip Hammond, defence secretary, may have won a victory by getting the Treasury to agree that use of reserve funds, avoiding an immediate spending crisis. But what is much more worrying for the MoD is that the 2 per cent cut creates a new baseline for MoD spending after 2015 that is £490m below current plans.

That means that the MoD must now plan to have £490m less in its coffers in every year from 2015 to 2020 – the date by which it must complete the overhaul of the armed forces set out in the Strategic Defence and Security Review.

“The MoD has not yet made clear what the implications of this statement are for its plans after 2014-15, but they must be very concerned that this new baseline will feed through to reduced budgets up to 2020,” said Malcolm Chalmers, research director at the Royal United Services Institute, a think-tank. “The danger is they will lose half a billion pounds from their current budget allocation every year in the second half of this decade.”

Professor Chalmers said the MoD would now have to contest this with the Treasury before the comprehensive spending review in 2015. He said the MoD would insist that the baseline should be the one agreed in the spending review in 2010 and not the newly reduced one. “However, the MoD will have a tough job winning that argument,” he said.

The MoD acknowledged on Wednesday night that the matter needed to be resolved.

“The budget for 2015-16 and beyond will be set out in the next spending review,” it said. “When the time comes, we will vigorously be making the case that the assumptions we currently hold, which include an agreed 1 per cent annual increase in the MoD’s equipment programme, remain valid.”

The MoD, with its £34bn annual budget, is arguably far more vulnerable than other departments to the spending cuts. That is because its strategy is based on the need to reconfigure the armed forces during the next eight years and meet deadlines for what is called Future Force 2020.

At the same time, the MoD has been heavily cut since 2010 and further reductions – at a time of growing crises in the Middle East – are likely to trigger a political reaction.

The cuts in defence spending will lead to huge reductions in the armed forces by 2020 – most notably the shrinking of the army to 82,000 staff, the smallest number since the Napoleonic wars.

The military has also seen big cuts to its assets after the scrapping of maritime patrol aircraft and Harrier jump-jets.

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