Defending Spending - Thoughts on the MOD & 2019 Spending Round

The 2019 Spending Round has been announced, with headline figures pointing to a 2.6% rise in the Defence Budget – equating to some £2.2bn extra funding next year. Coming after a period where expectations seemed to have been set low, and the MOD was seemingly on track for a flat rate settlement, this seems potentially very good news.

This spending round is a one off, and is likely to see a further 3-5 year review occurring next year which will show the longer term direction of government spending. But it is helpful to understand what the key benefits are for Defence and wider national security and to see where the money may be going.

Already the armchair admirals are out in force, creating spending lists of capabilities in their head to buy for the military. It is safe to say that within minutes of the announcement, a legion of virtual generals had come up with shopping lists so long, they’d trebled the size of the Departmental ‘black hole’.

MOD tactics to 'persuade' HMT officials were rather punchy!

- Image by Ministry of Defence; © Crown copyright

In reality the money is being spent in several different ways, but on some clearly defined areas, none of which are likely to see significant growth or change to the size of the armed forces.

The headline figures are a £2.2bn increase, taking defence spending from £39.5 to £41.3bn in the next year. Of the settlement, some £700m (roughly 30%) has been allocated next year for pension provisions due to wider issues. This is likely related to the successful legal challenge over the ending of the previous military pension scheme, and in turn a move to compensate people as appropriate.

The sheer size of the bill is a good reminder of how expensive departmental pension obligations are, but it may also help retention in a small way if it is used to support in service personnel who feel they have been negatively affected by these changes.

Roughly £1.2bn has been allocated for the next 12 months to support capital procurement, including prioritising key capabilities such as cyber, ship building and the nuclear deterrent. In simple terms, this is additional money to support some very specific areas, rather than a bonus pot of cash to be doled out at will.

It is likely that the funding will already be earmarked to support various in year projects, to either enhance existing projects (possibly adding capability in), or to accelerate or bring forward some other projects, or finally to restore capability cut or descoped previously as part of the programme. In simple terms, don’t expect much in the way of genuinely new stuff from this announcement!

A one-year settlement is great to help keep things going, but what it doesn’t provide is longer term funding stability to ensure delivery over many years. So in the case of ‘fantasy fleets’ Humphrey has already seen a suggestion that the RN should buy multiple additional T31s. On paper this is great, but there needs to be funding beyond next year across multiple lines of development to ensure this becomes a reality.

Committing to multiple extra ships means finding and securing funding for several years to support training, personnel, additional stores and resources, uplifting accommodation and all manner of other low level and small issues which collectively start to cost quite a lot of money. Without this longer-term certainty, such a move could end in disaster if in the next spending round no funding is available to carry these programmes forward.

Instead it seems likely that this is about finding enough cash to deliver existing commitments as planned and get them on contract, or take advantage of the ability to spend now to save in due course.

The final sum of money that is available is roughly £300m to fund priority capability programmes. Intriguingly this talks about it being for 2019-2020, implying potentially this financial year.

This may imply an amount of contingency funding being made available to buy out programmes looking vulnerable as a result of the precipitous decline in exchange rates recently, and ensure that they can expect to deliver as required. It is unlikely to amount to significant extra funding for new or additional capability beyond what is already planned.

The big question though is whether this is genuinely new money or if it is partly recycled. The mention of the nuclear deterrent funding raises questions about if the MOD is drawing on some of the HMT contingency funding that is held for the Trident replacement programme as part of the settlement.

Also, no mention is made of the requirement on the MOD to deliver in year budget efficiencies. Previously NAO and other reports have noted that MOD is on track to fail to deliver multi-billion pound efficiency programmes, despite agreeing to them as part of earlier spending rounds. It is not clear from this document whether this funding is drawn from MOD achieving these savings in year, or if MOD still has to meet in year efficiency targets while also benefiting from extra money. The devil will almost certainly be in the detail…

The final point to note is that while new money is very welcome, the MOD still has a very large and potentially unfunded ‘black hole’ in its equipment programme that could be as large as almost £15bn. While additional funding is welcomed to help deliver this, what remains unclear is how much more needs to be done to solve the funding gap and make the books balance. It is still entirely possible that some form of defence cuts may yet be required to make this happen.

More widely the review also heralds good news for the FCO which will see 1000 additional staff recruited and 14 posts upgraded or opened as part of wider efforts to raise the UK’s diplomatic presence overseas.

This is to be welcomed as the FCO costs a pittance to run but provides priceless influence and access to help avert crises before they happen. Widening the UK’s diplomatic presence in the world will help expand influence and help solve challenges effectively. This is to be warmly welcomed as a positive move.

The result will be that the UK will possess one of the largest diplomatic networks in the world, and one that is growing considerably year on year, with multiple new posts opening in both Africa and the Asia Pacific region recently – for example the British High Commission in Vanuatu has just reopened to help reinforce UK influence in the region. This funding announcement is likely to result in even more site opening soon.

Overall this settlement seems good news for Defence. It provides sufficient cash to ensure projects that matter, such as shipbuilding will almost certainly see progress this year. With the Type 31 and RFA FSS project approaching critical points, this funding will be a welcome boost to secure their future.

But, a word of caution is that we should not expect to see significant long term uplifts or changes – the funding is for one year only and the real battle that matters will be next year as plans are laid out for the multi-year period ahead. This is a welcome and visible show of support, but lets not play fantasy fleets just yet…