Good news can conceal a multitude of elephants - Thoughts on the 2013 Spending Review Announcement

Well the weeks of speculation are over, and the results of the Spending Review (SR) were finally announced in Parliament today by the Chancellor George Osborne. As expected all departments bar those previously confirmed as having secure funding received cuts. The real question on most people’s minds though were ‘how bad is it going to be’?

In simple terms the MOD appears to have done remarkably well out of this settlement compared to previous public expectations of doom and gloom. It is no small feat to emerge from a bruising spending round with a relatively small cut to the overall budget, and with a commitment to keeping capital expenditure on a flat (i.e. real terms small decline) basis. That this has  happened is perhaps testimony to the remarkable efforts by the MOD to bring its budgets under control in recent years – the realism measures pushed through, the efforts to close the black hole and the persuasive case made that major cuts to the budget would force structural cuts seem to have combined to put forward a case where the MOD is about 1.9% worse off overall – in realistic terms it couldn’t have got much better than this. What does it mean in real terms though?

The announcement is clear that the savings expected of the MOD will not come from front line capabilities, which instead will be protected. Rather savings seem to be identified as coming from renegotiated contracts, changes to equipment procurement practise (e.g. different contract negotiations) and cuts to the MOD Civil Service. There was also a hint in the actual supporting paper that there is a possibility that any underspend this year may be carried forward to future years, which could go a long way to resolving the challenge.

Some of the measures may prove difficult to implement quickly – while it is appealing to push for changes to contracts, and to try to improve PFIs or other measures, this can often take a long time to push through. This is not to say it is impossible, but it is clearly going to be a real challenge to deliver on this front. The question is what happens if the projected savings aren’t found and where will alternate savings come from?

The next challenge is going to be balancing the equipment programme, which is built on some fairly optimistic planning assumptions. A cursory glance at NAO reporting shows that there is a qualified view that it is fundable, but this is dependent on growth and a very small rise in inflation. Given there are cost increases likely to be out there (one only has to look at the NAO report on CVF to see the strong hint that a large price rise may be imminent), then the worry is that while the budget balances today, will this continue for the next three years? A real terms shrinking budget, matched with growing equipment costs can have the potential for real headaches – there isn’t much flex in the contingency fund, and the perhaps nightmare scenario is that having solved the infamous ‘black hole’ there is not as much money left as hoped, and that it re-emerges in due course. A combination of cost growth, inflation and an inability to make structural changes ahead of the next SDR could be a very challenging time for Defence.

Civilian Cuts

The review announced that the MOD Civil Service will see its number shrink, and allowances will be slashed, and pay restraint continued. It seems that with very limited space to manoeuvre (no equipment cuts, no structural changes, no manpower reductions) it was inevitable that the only place left to turn was the civil service.

Humphrey was probably not alone on Sunday in feeling dismayed that news about the fate of possibly thousands of hardworking and committed MOD Civil Servants was communicated via the medium of the Andrew Marr show, and not announced today. It is perhaps unfortunate that the MOD CS should be regarded with such disdain that announcing job losses can be seen as a ‘good Sunday headline’. It is unthinkable that military job losses should be announced in this way, and it is perhaps a sign that the MOD CS is seen as a politically expendable pawn in a manner that the armed forces are not.

While some job losses are inevitable, the worry is that there will be ever more pressure on CS headcount without a matching reduction in workload. While firing civil servants is always popular, what doesn’t seem to have been addressed is that the work will probably continue, placing more burdens on those who are left, both civilian and military.

The wider problem is that this continued gutting of the MOD Civil Service is going to have a real impact on morale and its continued ability to generate good quality staff who can support the needs of this country. Normally spending reviews either see bad news for both uniformed and civilian personnel, or some kind of ‘sweetener’. Today’s news has effectively created a split between the military and the civilian component of Defence, who are being treated in two very different ways.

Speaking to friends and acquaintances, the author picked up a sense of real anger at the manner in which the CS is being used as a political pawn in this way. No one doubts that when belts are tightened cuts need to be made. But there was immense frustration that the military seem to be being treated in a very different manner to their civilian counterparts.

Freezing salaries, reducing allowances and confirming the loss of pay progression will help solve a short term budget problem. It has the potential to cause a much longer term morale and retention problem too as well. It is hard to overstate how fragile morale is among friends of the author – they feel as if they are seen as the problem, and that their efforts are not remotely valued by their seniors. The MOD CS has not had a pay rise of any form for several years, and the much vaunted pay spine progression was scrapped some time ago too. This means that many staff have taken a real terms 15-20% pay cut in this time. The scrapping of the pay spine will help save money, but it will leave to a potential mismatch in salaries and cause real resentment – The DE&S is currently advertising for new C1 Grade project managers at a starting salary significantly above that paid to the majority of people based there in that grade. It has caused upset at those who have stayed through the tough times to see new entrants earning far more than their experienced colleagues, who in turn have no chance of progressing up to those equivalent salary levels for many years (assuming 1% pay rise per year for next 3 years, it could be up to a decade before they match what is being offered now to new entrants). No one joins the civil service to get rich, but they do stay and acquire niche skills and experience. By causing large swathes of a highly talented workforce to feel so isolated, there is a genuine danger that they will walk away and leave massive recruitment problems and loss of corporate knowledge. The authors worry is that this announcement may be the breaking point for many people who have irreplaceable skills.

The other problem is long term recruitment – a very large number of the MOD staff are now in their late forties and early fifties. They will retire within the next 10 years and yet efforts to freeze recruitment mean that the replacements needed to train now are not coming on stream. As these people go, then they go without relief – the problem is that it takes years to train the specialists out there, you can’t just appoint someone to many of these positions. Failure to recruit now will save money, but could mean a critical loss of skills and knowledge in 10-15 years’ time when the next generation of experts will not exist.

 

In the medium term the challenge will be to retain the goodwill of a workforce who many feel are being made scapegoats in the manner of bankers. It will be extremely difficult to sell the news today as being 'good' for the civilian component, and many friends of the author feel as if a two tier department is emerging in which they perhaps are seen as less valued and more expendable than the military.

The elephant in the room?

The problem faced by MOD though is while it is not permitted to look at things like service numbers or structures due to the desire of politicians to protect this, it remains saddled with a force structure that is becoming increasingly expensive. The fundamental challenge that policy makers will need to wrestle with over the next few years, and particularly in the 2015 and 2020 SDR is how do we afford the personnel who make up our armed forces?

Reducing civilian numbers will help make some small savings, but it is worth remembering that some 70% of the MOD CS earn under £25,000 per year, while some 80% of the Military earn over £26,000 per year. The military pay bill is enormous, particularly when the allowances are factored in as well, and one is quickly left looking at just how well paid our service personnel are. Now the author does not for one second begrudge anyone their pay – as a Serviceman he knows full well how difficult and dangerous the job can be, and there have been times when no matter how good the money, it didn’t feel anywhere near enough psychologically to cope with the challenges being faced!

But, as we move away from HERRICK we are going to a force structure where over 95% of the UK military will be based at home, and highly unlikely to be deployed on operations like HERRICK or TELIC. The news that they will receive continued pay rises this year, and the news that they will receive progression pay (unlike any other part of Government) recognises the special challenges of military life, but also comes at a cost.

Cutting the civil service and cutting allowances or estate can only save so much money – if at the time of the next SDR similar guidance is in place, then it is hard to see how the money can be found without wholesale cuts to the civil service.

The challenge now is how to pay and support a military which is becoming increasingly expensive to run, and equip with the highest grade equipment and house in reasonable facilities. The UK could afford a large military in the 1960s in part due to very low pay and very poor conditions compared to today. Cutting troop numbers means reductions in equipment orders, real estate, infrastructure and pay / allowances plus wider savings. Cutting civilian numbers merely saves on pay and a small amount of real estate if offices are closed.

As defence moves towards the next SDR it will need to think carefully about how a force of some 150,000 regular personnel can be kept and equipped properly within  the tight budget margins which exist today. Having staked a political line in the sand over troop levels and force structures, the challenge will be for the current Government on how best to keep this going – particularly if inflation hits and equipment costs rise spectacularly. For as long as troop numbers remain untouchable, the MOD will be forced to make increasingly difficult choices about how it finds savings - there is no easy answer to this difficult question.

Looking Forward

So today has seen a relatively good news day in the short term for Defence as a whole – it knows how much it can spend until the next SDR in two years time, and also that it is hopefully unlikely to have to enter this while conducting in year planning rounds to make the books vaguely balance. This means in turn the real chance of a proper policy led review.

The challenge though is that through political will, Defence is finding itself increasingly constrained in its ability to deliver the savings of it. The inability to cut equipment projects, or to review troop levels makes perfect political sense, but the worry is that it leaves such little scope for other cuts, that at some point something may have to give. There is no right answer to this conundrum, and much will depend on the political guidance offered at the time of the next SDR, which will set the tone for the whole experience to be repeated again in 2016 at the next spending review…