Money, Money, Money - the MOD budget announcement

The Prime Minister has confirmed that the Ministry of Defence will receive a very substantial budget uplift over the next four years to fund national defence and security objectives. This will see some £16bn extra funding, beyond previously agreed spending going into Defence in order to set the conditions to transform the force. Good news – surely?

On paper this is an extremely welcome development, and one that will be warmly welcomed across the MOD and wider defence industry. It provides additional funding, and helps provide certainty across several years – making it easier for industry to plan and price projects, knowing there is much greater certainty than there has been for years.

The first point to consider is ‘where is the money coming from’? Its unclear yet where the money will come from to support this extra spending. There seem to be several options, which include is it genuinely entirely new money, added without preconditions to the budget to help MOD out of a difficult financial position. If so, then this is a remarkably generous settlement.

Alternatively, does the package involve bring forward of money from other sources – for example, there is a considerable contingency reserve squared for DREADNOUGHT construction – is part of this the allocation of funds from that to the project, and if so, how much?

Does the package require Defence to deliver in-year efficiencies that could be retained and recycled into new spending? A characteristic of many previous spending rounds has been a headline generous settlement that on closer digging called for MOD to make considerable in year savings to realise the sums required – much of which it then singularly failed to do.

Its unclear whether this budget will require the MOD to find efficiency savings that it can plough back into wider defence spending as a condition of being given access to genuinely new Treasury money.

Finally it could be a bit of everything – some new money, some allocated from existing projects, and some that will be released and saved – in other words a mixy blob of funding outcomes. Not ideal but definitely better than the previous situation.

The next point to make then is that this is not the time to dig out the Silvermans catalogue and get out the corporate credit card. This funding is welcome, and it will make a difference, but it is not going to fund a future force of lots of new fun toys. Already the internet is awash with new orders of battle that involve T31s teeming with anti-ship missiles, enough P8s to lay sonarbouys to enable someone to walk from Iceland – Greenland – USA without getting their feet wet, and many more ASTUTES than could conceivably be delivered.

If you’re thinking that this is what the budget means, then I’m afraid I’ve got bad news for you. This boost is not going to create the Fantasy Force of your dreams, no matter how alluring the figure of £16bn looks on paper.

The MOD equipment plan is already significantly over budget (potentially about £13-15bn over budget) and its getting worse. It is likely that some of this money will be used to provide certainty to programmes, and solve ‘in year problems’.

For example it may be the case that right now the Equipment Programme is struggling because in the multi-year planning horizon, some projects are proving unaffordable in specific years – in other words, the point where all the major projects need lots of money is coinciding at the same time, and there is not enough money to pay for it, and the other option is to delay/defer/descope to save money and smooth the programme out.

If though more cash is available in year, then suddenly this makes many of these problems go away – meaning procurement can proceed more smoothly, and not be delayed due to a lack of in year cash. As such, this extra money is essentially the equivalent of a ‘pay day loan’ that doesn’t need to be paid back – solving short term problems, without the risk of Treasury loan sharks stealing your favourite jet fighter if you fall behind in the repayments.

Image by Ministry of Defence; © Crown copyright

We do need to be clear though – not all programmes are going to survive. Even with the extra cash injection, there is unlikely to be enough cash on hand to ensure the whole equipment programme survives unscathed. Instead it means that more programmes are affordable than previously thought, and in turn this means more is likely to survive – it doesn’t mean things won’t get cancelled or scrapped.

What is particularly important to understand is that whether we like it or not, defence cuts are coming. Equipment will be paid off (e.g. the older Type 23s are looking more vulnerable than a tethered goat in a T-Rex cage at Jurassic Park) in order to not only save money, but free up resources for the future.

People will rightly ask, why on earth is the MOD scrapping kit when its suddenly flush with cash? The main reason is that this injection of funding is about transforming the armed forces, but to do that you need the resources (people, infrastructure and cash) to deliver it.

Many of the older legacy parts of the force are now well past their prime and are costing a lot of money to keep in service for ever diminishing returns. To keep it going can require long supply chains, contract management, trials, training and taking up time to deliver something that may not be hugely relevant or useful.

All of this costs a lot of money – for example to keep the older Type 23s going costs millions per year, but requires a much wider network of support contracts, people, training of them and effort to keep the ships going. They’re long past their design life and are ever more fragile.

If they are paid off, then in the short term there is a temporary reduction in hulls – but what do you gain? Suddenly you’ve freed up several hundred sailors who can be reassigned to fill gaps in the force that is desperately short staffed, thus easing crew challenges and improving overall availability in crew shortage areas.

You can also cancel upgrades, supply contracts and refits, saving a lot of money, and freeing up capacity to do other things with the money and the teams involved.  In other words, you’ve reduced a lot of costly pressure and freed space up to try something new. Even something as simple as freeing up DE&S teams is helpful – creating headroom to stand up new project teams, bring the commercial expertise in, and start the project off.

Trying something new is really what this is all about – its about creating the headroom in MOD to have the space to really change and embrace new technology. By freeing up funds now, they can be used to try out new kit, to trial it, to develop concepts of operations and to put the right policies and procedures in place to use them properly.

For example, paying off a T23 it could allow the freeing up of people to crew an uncrewed trials unit, testing capabilities, working out the ability to operate and making use of trials ranges that would otherwise be taken. This in turn does the groundwork now to roll out a genuinely game changing capability in a few years time.

To that end, we need to take a longer term perspective here – this isn’t about a short term sticky plaster to solve an in year problem. This is about freeing up the cash to go away and radically rethink how Defence does defence – and that’s a superb prize to have.

Instead of trying to transform on the side, doing it where resources and programmes permit, this is about really embracing the future opportunities ahead and leaping in and making sure the UK gets ahead of the game.

If we look out to 2030+ then we can see that the potential reward is vast. We’ll have had several years of properly funded research, time to put new equipment on contract, time to test it and make sure it works – ironing out the bugs and making it central to doctrine and operations.  In other words, its about the reinvention of the fundamentals of how to operate, not just tinkering with an impressive sounding shopping list and wondering what to do with it.

This is really exciting stuff – its hard not to get excited by the possibilities on offer if the military get this right. They have the chance, the space and the funding to really refocus on what future operations will be like with this funding, and in the process make sure the armed forces remain fit for purpose.

It will be hard seeing the cuts likely to come to deliver this – fewer troops, fewer units and fewer ships all seem a likely outcome in the short term. But this needs to be carefully set against what we’re gaining. This isn’t about a classic order of battle of units, but about the effects we’re seeking to have and the way we achieve it.

The future way of military operations will be very different, they will need us to think differently and they will be conducted differently. While we could keep running on older stuff, the risk is that keeping it in service for the sake of numbers hides glaring deficiencies and potentially gets people killed. Far better to be honest, step away from that which is less relevant and focus on the future, not the past.

The final key point to make is that Defence cannot fail. The Prime Minister has now invested significant personal and political capital in this outlay, and expects results. In what will be an ever tighter public spending environment, to gain essentially a 10% budget hike for 4 years is about the most generous settlement imaginable – particularly for a department that doesn’t capture election deciding voters hearts in the way the NHS does.

There is a risk that Defence will see this as an opening gambit and squander the opportunity – spend the money and then ask for more without having delivered. The press last week had comments from ‘insiders’ about how £20bn was the answer not £15bn to solve the problems.

This is dangerous talk – in Whitehall terms the MOD just got the best possible result. It cannot expect such largesse again if it fails to deliver its vision, given the uplift of resources made available to it. There is a clear message here – as Defence is always saying ‘with a bit more cash we could do the following’, it now has a chance to follow through on this.

While this may be painful to hear, the message is a simple one – don’t screw this up. Getting this wrong could have very painful long term consequences for Defence, and enrage a PM and Chancellor who have taken a lot of political risk to deliver this for the MOD.

So, overall this is a good outcome – but it needs to be seen in context. This is not going to deliver the fantasy force of dreams. It will still result in painful cuts, and there are going to be difficult times ahead.

But it is important to see this in context – much like the SDSR in 2010, painful as it was, shaped the path to the Force 2020 vision, this is about shaping the path to the Force 2030 vision. We need to ask not about what this money means for our short term, but what opportunities it creates for the medium – longer term and how this can be exploited.

The publication of the Integrated Review next year will be the next step in this chapter, heralding the likely structural changes and equipment reductions to follow. This will be debated at length in time, and there will be more written here on the subject but for now it is sufficient to say that for many in the MOD and the Defence industry, they can be assured of a very merry Christmas indeed!