Making The Numbers Add Up - Thoughts on the UK Defence Budget Challenge

 

It seems that the MOD budget settlement is heading for turbulent waters. Hints in Parliament suggest that the MOD requires a further £8bn a year just to factor out the cost of inflation and currency fluctuations. At a time when the UK needs to make significant financial savings, is this credible, and is a longer term growth to 3% of GDP a pipedream? Why though after a summer of pronouncements on Defence budget growth is this problem occurring, and what should we make of it?

There are essentially three distinct challenges facing the MOD that it needs to resolve. The first is to work out how much money it has available in the short term and what it wants to spend this on. The budget settlements agreed in 2021 as part of the Comprehensive Spending Review are now effectively being reopened as part of wider efforts by the Treasury to balance the national budget. The combination of less money to go around, higher than anticipated inflation and a significant negative decline in the value of the pound means that spending plans are no longer credible.

Image by Ministry of Defence; © Crown copyright 2023.

In the short term the MOD needs to agree how much it will have made available to it over the next two years. It is impossible at the moment to predict what this outcome will be, but there are three real options – real terms budget growth, maintaining the budget in line with inflation (so extra money but not in real terms) and finally budget cuts.  Option one seems unlikely at the present time, while option two would involve a roughly £8bn injection of cash over the next couple of years, which would in turn make this one of the most generous funding awards from the Treasury in recent memory. Option 3 could still be on the table, but would be politically ‘brave’…

In the short term the MOD will be faced with a likely combination of trying to deliver more efficiency savings and making painful decisions about what capabilities to cut, or take short term risk on, in order to balance the budget. This in turn leads to the second major challenge facing the MOD, which is what to do about the Integrated Review. Difficult decisions will need to be made about where to prioritise spending, where to protect spending and where to cut spending – all of these will arouse strong emotional reactions and result in a campaign of leaks intended to influence and inform the media.

Planners will be faced with working out how to reduce spending in some areas while still delivering against government policy aspirations and supporting longer term goals as well. This may require short term cuts which could be painful in the near term, but make sense longer term if it protects funding for replacement capabilities, or it could require a change to the level of aspiration – for example stepping away entirely from doing something a particular way.

The risk here is paradoxically that while there is short term pain ahead, there is also clearly longer term growth planned which will see in the later part of the decade a potential rise of up to 2.5-3% of GDP spending on Defence – a literal opening of the cash floodgates. Planners will need to work out how to be frugal and live in their means in the short term, but know support is coming in the medium term – and this is actually a bit of an issue. What can you switch off, only to switch back on again in Defence in due course a year or two later without disrupting things and making it cost more in the longer term?

The wider challenge is one of reputational credibility. The UK is rightly proud of both its work in supporting Ukraine and also its position as a globally capable military power. But if it gets the balance wrong in terms of investment decisions and what to support, it runs the risk of being seen as less credible – decisions to disinvest in sorely needed areas may raise longer term questions about whether the UK is an ally of choice or an ally who freeloads. At the same time though planners will need to contend with identifying whether its better to take capability out of service to free funds up for new longer term relevant equipment (sunset/sunrise) or to run on now and be present in the moment, butat the financial cost of being less relevant longer term as they are unable to afford to fund replacements. These are ‘wicked problems’ to solve without easy answers.

For example some people may want to see the Ajax programme cut – it would free some money up to solve short term financial woes, but it wouldn’t take away the challenge of needing to keep other vehicles in service to cover the gap and also identify a longer term solution that may take years more to arrive – deferring expenditure on a critical capability until another point in time when it may cause more challenge to fund. There is no simple answer to solving defence budget pressures – if it was easy, it would have been done already.

Image by Ministry of Defence; © Crown copyright 2023.

The final part of the problem is working out how to spend extra cash when it arrives and be able to be ready for it. Despite what people may say, suddenly announcing an extra £10bn for Defence in year is not terribly helpful. It sounds good, but is there a clear plan, or even the internal capability to spend it in a way that makes sense? Can you put things on contract in this time, or will it actually lead to a logjam of people trying to spend money like its going out of fashion?

Similarly, spending money in year is great, but where is the long term funding solution coming from? You do not write a cheque for (say) £1bn to industry and go ‘here is the money for an extra Type 26’, rather payments and spending is spread out over many years at different stages of the contract – having money in year doesn’t mean you can spend it all at once. Also where are the people and infrastructure coming from to operate new equipment – this will take years to introduce and require careful planning and investment in everything from training courses to new accommodation and workshops, as well as establishing a supply chain of spare parts and logistics.

Being flush with cash in the short term can lead to a ‘boom and bust’ defence industry which is literally unable to meet the demand of the MOD and by the time its built up capacity to deliver, the money has run out or been cut. This can create a vicious circle of supply and demand coming in peaks and troughs, rather than a longer term sustainable way. Far better to have a plan that ramps up over a couple of years, with a clear demand signal that industry can prepare for and be able to respond to, than just throwing money at the problem and wondering why it cannot deliver in time. The Germans have found this exact problem this year, having significantly expanded their defence budget after the invasion of Ukraine, they now find themselves unable to spend all of it, and lacking the internal ability to spend it fully, and industry unable to deliver. The result is that the money has, literally, been wasted. Sometimes having lots of money isn’t the answer, but a long term plan to grow the budget slowly is much better for everyone.

Looking ahead we’re likely to see a very emotional few weeks for watchers of defence matters. There will be coverage hinting at delays, cuts and changes that people will not welcome. This is the time to provide the usual health warning of believe nothing until it is announced by a Minister in Parliament – until that time, there is everything to play for!