Sunday, 26 September 2010

How Big Is The Overspend

This was part of another post but it is worth a little more prominence as it is at the heart of current debate over the future of the British armed forces.

A quote from Max Hastings:

"The initial challenge is to save £37bn by 2020, merely to meet unfunded obligations accepted by the last government.

If the Treasury is implacable in insisting on large savings to help address the public spending deficit, then the forces’ future is bleak indeed."

These unfunded obligations are in themselves one of the most interesting aspects of the entire defence debate.

They relate entirely to the equipment budget.

To quote the Defence Secretary Liam Fox in Parliament on the 13th of September 2010:

"Before the Labour party lectures the coalition Government about the financial implications that we face, it might want to remember that with a defence budget of some £35 billion a year, it has left behind an overspend in the equipment programme of £38 billion by 2020, with which we are going to have to deal."

On what basis was this £38,000 Million figure calculated?

According to The Major Projects Report 2009 by the National Audit Office (N.A.O.):

"The size of the gap is highly sensitive to the budget growth assumptions used.

 If the Defence budget remained constant in real terms, and using the Department’s forecast for defence inflation of 2.7 per cent, the gap would now be £6 billion over the ten years.

 If, as is possible given the general economic position, there was no increase in the defence budget in cash terms over the same ten year period, the gap would rise to £36 billion."

Which means that the overspend is only £6,000 Million if the budget rises in line with inflation and the equipment programme is not cut.

But if the equipment programme is not cut and the budget does not rise in line with inflation we have a £36,000 Million overspend.

In effect,keeping the budget constant in cash terms over the next 10 years equates to an additional £30,000 Million cut in real terms.

Which raises an interesting question about forthcoming budget cuts.

If the defence budget is cut by 10%,does that mean an immediate 10% cut followed by increases in line with inflation thereafter or a 10% cut followed by 10 years of a constant budget in cash terms?

Only in the latter case would we see the £72,000 Million of cuts which have been mentioned recently.

It could also mean minor annual cuts in cash terms to produce a 10% cut in real terms by 2015.

Without knowing the profile of the expected cuts it is difficult to get even a remote idea of how severe their effect will be.

But it is important to understand that the figures ranging from £35,000 Million to £38,000 Million which we see consist of approximately £6,000 Million worth of equipment overspend over the next 10 years and £30,000 Million worth of expected real terms cuts to the budget.

That core £6,000 Million overspend is just as interesting.

There is little mention of it in the House of Commons Defence Committee's report Defence Equipment 2009.

But it is mentioned in The Major Projects Report 2009 by the N.A.O.,(principally on Page 22 but also not ethe correction on Page 3).

How did a £6,000 Million overspend materialise between the publication of the Defence Committee report in February 2009 and the publication of the N.A.O. report in December 2009?

The Defence Committee would be very interested to know the answer to that question.

To quote the House of Commons Defence Committee's report Defence Equipment 2010:

"The evidence suggests that at the time that MoD witnesses gave evidence to our
Defence Equipment 2009 inquiry, the MoD was in the process of taking steps to
manage a funding gap of £21 billion.

 Witness denials at that time of the existence of
such a gap now appear disingenuous.

 The Minister for Defence Equipment and Support told us he could not provide any information about how the gap was reduced to £6 billion, nor the proportion of expenditure which was merely postponed beyond the planning period.

 When we pressed in writing for further details, the MoD provided little extra information.

 We reject the MoD’s arguments for refusing to disclose the measures it took in order to reduce the funding gap to £6 billion.

 We cannot fulfil our scrutiny role if the MoD refuses to provide such
information about its activities."

It is not difficult to see why the Defence Committee was so angry,to quote page 33 of their report (I strongly urge you to read the whole of this section of the report):

"In our Defence Equipment 2009 Report we noted that many defence commentators had
raised concerns that the equipment plan was underfunded.

RUSI Acquisition Focus had reported in RUSI Defence Systems Spring 2007 that :

“The equipment plan has been estimated as underfunded by some £15 billion or more over its ten-year period”.

In oral evidence last year, CDM (Chief of Defence Materiel General Sir Kevin O'Donoghue) told us that he was unable to estimate the size of any funding gap,and described the RUSI figures as:

 “a tad ill-informed”.

 The Minister for Defence Equipment and Support (Quentin Davies) told us that

“the equipment programme is an affordable programme.

 We have had to make an adjustment about exactly the pace with which we are bringing certain things forward and …some of the priorities are being increased and others set back a bit”.

At a conference in April 2009, he was recorded as saying:

"The idea of a defence deficit of £15 billion or £10 billion or £20 billion—think of a number and double it—is fantasy.

 There is no such deficit.

 That figure has no relevance to any reality at all and I am the man who ought to know.""

In summary,first the Ministry of Defence told the Defence Committee that there was no overspend.

Whilst at the same time they were trying to deal with a £21,000 Million overspend which they had probably just not noticed up until that point,it is only £21,000 Million after all....

Then the £21,000 Million overspend was turned into a mere £6,000 Million overspend,by using skills which had clearly been learnt from King Midas to eliminate £15,000 Million from the equipment plan.

Until the National Audit Office decided There was actually going to be a £36,000 Million overspend (not counting the £15,000 Million overspend which had mysteriously disappeared) as the defence budget was likely to be frozen in cash terms for the next 10 years.

Then it was realised that the defence budget was likely to be cut by at least 10% which meant the overspend might actually be £72,000 Million.

Well,possibly,anyway,sort of,it depends.

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