UK defence budget fundamentally unaffordable, says report

• Report: Ministry of Defence - Major Projects 2009
• Committee of Public Accounts

Edward Leigh MP, Chair of the Committee of Public Accounts, today said:

"Britain’s defence budget is fundamentally unaffordable. The MoD estimates it at £6 billion over the next ten years but that figure depends on the assumption (surely optimistic) that there will be a year-on-year increase in funding of 2.7 per cent. According to the National Audit Office (NAO), even if cash spending on defence remains flat, then the projected deficit will be of the order of £36 billion. The deficit could be even higher than that.

"Matters have worsened to the point where the Department will have to take difficult decisions, such as to cancel whole equipment programmes.

"That the MoD has got itself into such a mess is an indictment of its current governance and budgetary arrangements. It has hitherto reacted to cost pressures by arbitrarily taking decisions to delay projects or reduce the amount or capability of the equipment on order.

"The problem is that such measures are often economies in the short-term only, leading to higher overall costs and poor value for money in the longer term. In future, they must not be implemented without a proper quantified assessment of the impact on military operations and their overall value for money.

"The Treasury has also been remiss, up to now focusing purely on whether the MoD’s books were balanced in each year and ignoring the fact that the major projects programme was becoming unaffordable. It must now seek assurance on whether new projects can be afforded within the overall defence budget."

Mr Leigh was speaking as the Committee published its 23rd Report of this Session which examined whether the Department’s governance and budgeting arrangements were fit for purpose and whether it understood the serious implications of reprioritising projects after committing to them.

The Committee's hearing identified the serious consequences of failings in the Department’s governance and budgetary processes. Even using the Department’s own, over-optimistic estimates the defence budget is unaffordable by some £6 billion. The exact size of the gap is dependent on the assumptions one makes about future funding, but the gap could easily be £36 billion and potentially even more.

Intentional decisions to delay some projects have increased total procurement costs and represent economies of the short term and overall are poor value for money on the specific projects affected, the report said.

The decisions were taken by the Department as part of a wider package to try to make the defence programme affordable over the next few years. They account for two thirds of the £1 billion of cost increases on projects in the last year. Crucially, they mean the Armed Forces will not get the operational benefits of new capabilities as quickly as expected and some equipments will only be delivered in reduced numbers.

The report added that decisions to delay projects, change requirements and reduce the numbers of equipments being procured adversely affect the Department’s ability to secure value for money from its commercial partners, yet the Department continues to do so. The Department is in the strongest negotiating position with industry before it places a contract. Slowing projects down once started almost inevitably increases their costs and takes pressure off contractors to become more efficient.

After years of reporting on the poor performance of individual projects, the Committee notes that this year there are some tentative signs that projects are better managing the costs over which they have control. In practice, the programming decisions taken to deliberately slip projects make it difficult to assess the performance of individual projects and we will be looking for evidence that the improvements can be sustained in future years, the report said.