Sunday, 13 October 2013

Underspending, not under investing - the MOD budget debate.

The Telegraph led yesterday with a story claiming that the MOD is sitting on a pile of nearly £2 billion cash as part of the MOD budget underspend. The story led an emotionally charged article, claiming that somehow the MOD was responsible for refusing to spend money which could pay for at least six infantry battalions, and also that it was down the Ministers and Civil Servants for refusing to let money be spent. The article attracted an extremely strong, and surprisingly emotive response from the Secretary of State for Defence, who in turn accused the individuals behind the claims of being ‘financially illiterate’.

Underspends are always deeply emotive issues, and it is easy to see why. At a time when equipment budgets are under pressure, troop levels are being reduced and people see ever more day to day challenges in spending money within Defence, it is easy to see why the public would be cross at the thought of money not being spent – after all for years people have been claiming that the MOD needs more money, not less.

The reality is that its actually not as straightforward as the Telegraphs pundits would have suggested. In truth the MOD is not a single budget, owned by a group of parsimonious civil servants at the centre, who guard each penny with their lives. Instead finance is spread out among many different component parts of the organisation – and let us not forget that this is a seriously diverse and complicated affair which directly involves over 300,000 people based at 2000 sites worldwide, and made up of many thousands of discrete budgets, which in turn are linked into wider budget structures.

Each of these units, sites, organisations will have money delegated to their budget to run their day to day operations, travel and other routine expenditure. As such one reason why funds may not be fully spent can be as simple as not exhausting the budget each year – for instance, predicting a need for 12 business trips for 2 people each year when only 6 happened with one person – effectively only 25% of the projected funds were needed. While this is terribly simple, it helps to try and make you realise that much of the underspend comes from a few thousand here, a few thousand there not being spent. In an era where everyone in defence has had austerity and the need to get value for money out of what they spend, it is inevitable that people will try to save where possible. Across an organisation as vast as defence, this quickly adds up into quite substantial savings.

Similarly, when one looks at the salary underspend (some £200 million reportedly), its clear that this was down to a higher than expected exodus of staff. The budget plans are often drawn up ahead (Humphrey can’t remember when the last set of planning was but it was probably about two years ago). Its hard to predict things like unexpectedly large staff outflows, and far better to plan on paying all your staff, than overestimating and running out of cash to pay those you've got left!

The problem with this debate is that rather than being seen in the context of Defence going through a challenging period, and trying to make savings, its instead been seen as a sign of incompetence. The new ‘we want eight and we won’t wait’ mantra seems to be linked to the numbers of infantry battalions in service – at least for the Telegraph. It is incredibly frustrating to see people genuinely hold forth that had the MOD spent its funding fully then somehow X units or Y ships would have been in service.

In reality budgets don’t work this way – the MOD has allocated funding not just to pay salaries, but to recruit, equip, train, supply, house and support a finite number of infantry battalions (among all other budget areas). It may well be the case that the Army has spent all of its budget this year, and that the underspend came from other areas, but next year, these areas may themselves need the funding line. The idea that funds can be chopped and changed willy nilly is dangerous – you cannot go through the decade not knowing from one year to the next whether there is sufficient funding for a unit to continue its existence. Similarly, the argument that the money would somehow have paid the soldiers salaries ignores that it would not have covered all the other aspects of their roles – and also that there wouldn't have been any of the combat support units assigned to support them funded. Sadly the defence debate seems to be framed around the idea that capability comes from front line established units, and not the dull and unglamorous support units and spending money on logistics.

As posters have pointed out on ARRSE and elsewhere, an underspend is actually a very good thing for the MOD right now. Firstly, it provides a reserve of cash which can go towards meeting the reductions in expenditure demanded under the next spending round – in other words its preventing further job cuts to the Army. Secondly, if as promised the cash can be held by the MOD, then it starts to provide a small pool of funds to look at gently regaining capability in areas where risk has been taken in planning rounds – e.g. buy back training exercises, increase stockpiles, improve in small areas which never get any public interest, but without which the Armed Forces would struggle.

The problem is that the debate does not get beyond the most superficial and simple ‘ despite spending less than planned, we have less infantry therefore the MOD is incompetent’ seems to be the line that will be adopted and no effort will be made to redress this. The fact that right now the MOD is in probably the best financial shape it has been for many decades is an irrelevance – it was precisely because some very hard and emotional decisions have been taken that the MOD is in a reasonable financial place.

The worry is that there is a lack of understanding, of a way of explaining to the public that combat capability is not measured just through ships or tanks, but in whether you can actually do anything with them. The MOD has perhaps chosen to invest in areas which lack the glamour, but which help keep capability alive and not moribund in a vehicle park, while excess soldiers parade glumly by.

What is also frustrating is judging by the language in the article, the continued efforts by retired military officers to try to shift blame away from their capbadges, their regiments, their service and instead to blame the politicians and the civil servants. There is an increasingly depressing line emerging in some quarters that somehow its all the fault of the nasty non uniform wearers and that if the military had their way, all would be well. This desire to blame, to avoid responsibility seems to run contrary to all that is taught at basic level – that of honour and shouldering responsibility. The problem is that the longer this continues, the harder it will be for the military professionals to have some really difficult conversations about where the balance of investment goes – today we stand of the cusp of an information revolution, where computer and cyber operations could change our entire concept of warfare. We see huge debates about whether military force sits within a wider framework of nation state building and intervention, and how the military is best placed to support this. Yet, as one exceptionally good discussion thread on the Army Rumour Service website ( asks, is there instead a mentality focused on the ‘good old days’ and not on looking to the future.

We stand on the edge of a revolution in military affairs, where the geek  from their basements and not the infanteer will have the power to take out cities, power networks and governments, alls. This will call for tough decisions on where to put the funding, but instead it feels as if the debate cannot move on from questioning whether the UK no longer has an Army because it has less than 100,000 men (a perennial favourite in some quarters). We need to embrace  new thinking and accept that much of what has worked for many decades has changed, but to do so means being more trusting of the civilian sector and not just accepting that Green always knows best. The article in the Telegraph would suggest that some retired persons have yet to take this onboard. 


  1. Nice but do you have a source to strengthen this like a document or report giving an overview of the various "pots" that make up the MOD budget structure?

  2. Try the MOD Annual Report and Accounts for 2012/13, published in early July. Can't remember the link, but will be on the MOD bit of somewhere. It's an education in the complexity of government accounting. We even got a qualification this year from the National Audit Office for compliing our accounts in accordance with Treasury guidelines, which I think is a first!

  3. No mention of millions held back awaiting someone to sign off on major projects? If the MOD has budgeted for major funding to complete a project this financial year, and the approval for release of funds is delayed until completion, the funding may well appear as a surplus.
    Multiply this over several projects and it becomes a huge sum.
    Exchange rates, lower than expected inflation and improved procurement can also build a useful surplus. It's to be hoped these 'savings' can all be carried forward.

  4. There's a reply on navy net:

    This isn't quite how it plays out - we can't use an underspend to offset against any reductions in the next planning round (ABC15) because that is based upon a different allocation of funding by which time the underspend will have been returned to HMT.

    Secondly, we've previously not had an ability to make use of underspends, we're doomed to fail by annuality the process by which HMT requires MoD to consume resources in-year with only a minor ability to carry tiny sums over into the next FY. This was meant to have been changed to allow programmed funds to be carried between years, I don't believe we have reached that yet.

    What this really means is that MoD simply can't discharge its function correctly, its given funding and a portfolio of capability to deliver but is denied one of the key drivers to do this correctly. If it can't move money between FYs it will never be able to properly manage its own portfolio. Doomed.

  5. While it's true that annuality is a programme management idiocy, it's not actuallycomplete lunacy if you understand its origin - as a key tool for Parliament to make sure that the executive can only maintain armed forces with the active consent of the legislature by only allowing it the money for a year at a time. (The other legs of that stool are the Armed Forces Acts, descended from the Mutiny Acts, without which military discipline and justice would be severely constrained, and the rather arcane Votes A, in which Parliament sets an upper limit on the size of the Armed Forces). For myself I think that is a principle worth remembering, although I grant there might be better ways of embodying it these days.