Black hole looms in UK defence, study says

A new black hole will open up in Britain’s military budget after 2015, according to independent research commissioned by the military and seen by the Financial Times, which suggests the next government may have to make further swingeing defence cuts.

The analysis, undertaken by a think-tank, shows that whichever government is elected in 2015 will have to find savings of up to £1.5bn per year until at least 2020 if current spending plans are maintained.

The findings appear to contradict the assertion of Philip Hammond, the former defence secretary, who insisted that he had closed the gap in the defence budget between the money allocated and the programmes to which the UK was committed.

Mr Hammond told the Financial Times he had balanced the Ministry of Defence budget and created an additional £12bn to fund extra programmes and cost over-runs until 2020.

But according to one person who has seen the military’s research, the black hole will resurface in 2015. The person said: “This government managed to salami slice its way out of the problems it inherited. But those problems will come back soon, as the equipment budget continues to run away.”

The MoD said: “We don’t recognise these figures or this report which, given spending plans won’t be set until after the election, can only be speculation. The defence budget is now on a strong and sustainable footing . . . [and] will ensure we no longer have to make short-term cuts just to live within our means.”

Many defence spending decisions – such as the replacement of the Trident nuclear missile and the commitment to a second aircraft carrier – have been postponed by the government until after the next election, leading to concerns over a budget shortfall. The next spending review will have to deal with a series of costly defence decisions.

The MoD is likely to face two main problems in the next parliament, according to the independent analysis.

The first is that the equipment programmes continue to rise in cost, which the authors argue is a result of “defence inflation”. This is a phenomenon that means military costs rise above the normal rate of inflation, and therefore require annual real-terms funding increases.

The second is that, while the economy is growing more quickly than that of most other developed nations, it remains behind where the government estimated it would be when it drew up the last Strategic Defence and Security Review in 2010.

The research suggests that the problem is manageable if the government lifts defence spending after the next election so it hits Nato’s target of 2 per cent of gross domestic product.

But, according to the analysis seen by the FT, that will be extremely difficult, if not impossible to achieve, given existing commitments to healthcare, pensions, schools and other parts of government spending.

So far, ministers have refused to sign up to meeting the 2 per cent goal after 2015. Mr Hammond previously said it “isn’t the best and most effective way to measure the defence effort”.

The Treasury has guaranteed that the defence equipment bill will rise at 1 per cent over inflation from 2015 to 2020.

But equipment accounts for about 40 per cent of the department’s overall spending and no similar guarantee has been made for the rest.

In the last spending round, defence was cut by 1.9 per cent, and Treasury forecasts suggest it will fall again after 2015 – although the government has not yet taken this decision.

The alternative to further cuts to equipment programmes would be an even greater reduction in the number of troops in the army, which has already shrunk to its smallest size since the Napoleonic wars.

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Letter in response to this report:

MoD mentality enfeebles UK defence policy / From Mr Tim Reilly