RUSI Analysis, 28 Jun 2013 By Professor Malcolm Chalmers, Research Director / Director, UK Defence Policy Studies

The Spending Review, announced on Wednesday, has surprised the numerous commentators who thought defence capabilities would face further significant cuts. The Ministry of Defence has achieved a settlement it really is substantially better than could have been expected.

This year’s Spending Review, the result of that have been announced on 26 June, was potentially fraught with risk for the Ministry of Defence (MoD). The 2012 Autumn Statement made clear that both largest spending departments – Education and Health – would continue to have most (and in Health’s case just about all) in their budgets shielded from real-term cuts. Other departments, consequently, would need to share the pain of meeting the Chancellor’s tough targets for further spending cuts in 2015/16. Because the largest department not protected by a Treasury ‘ring fence’, the MoD gave the impression to be within the firing line for further significant cuts.[1]

Given this place to begin, the Ministry of Defence has achieved a settlement that’s substantially better than could have been expected. The total ‘flat cash’ settlement (Total Departmental Expenditure Limit (DEL) spending falling from £32.7 billion in 2014/15 to £32.6 billion in 2015/16) just isn’t so different from the ‘near-flat cash’ settlement within the 2010 Spending Review (Total DEL rising from £32.9 billion in 2010/11 to £33.5 billion in 2014/15). In real terms, the two.0% real reduction announced for 2015/16 is roughly corresponding to the 7.5% real reduction over four years that was announced in 2010 (which equated to a median 1.9% annual reduction).[2]

Of the complete £74 billion of cuts made because of the 2010 Review, however, greater than £51 billion would was necessary despite the fact that the defence budget have been maintained in real terms throughout the decade as much as 2020.[3] The 2013 Spending Review, against this, started with a forward defence plan through which commitments and budgets were broadly in balance. Here’s the major reason behind why the MoD have been capable of avoid a repetition of the kind of painful decisions (sharp reductions in personnel numbers, gapping of vital capabilities) that resulted from the 2010 SDSR.

The MoD’s position was helped by two further decisions inside the early stages of the Review. First, as a result of Government commitment to at least one% annual real growth inside the equipment budget, the objective for reduction within the Resource Budget was calculated only in connection with its non-equipment portion (that is just over 70% of total Resource Departmental Expenditure Limit – DEL). Second, the Treasury’s initial saving target for the MoD non-equipment resource budget was set at only 5% in real terms, compared with up to 10% for other non-ringfenced departments. Taking these two decisions together, the Treasury’s target for the MoD resource budget as an entire was for a genuine reduction of around 3.3% from 2014/15 levels.

Yet the MoD faced another challenge. The 2012 Autumn Statement, published in December 2012, had announced an extra £490 million reduction in MoD’s 2014/15 resource budget;[4] and the Treasury insisted that the adjusted 2014/15 figure may be used because the baseline for the 2013 Spending Review. Moreover the three.3% real reduction requested by the Treasury, therefore, the MoD needed to discover a further £490 million saving for 2015/16. Together, these two reductions would have required the MoD to discover around £1.4 billion in savings in its planned 2015/16 resource budget.

Attempts to transfer some elements of the MoD budget to more protected departments (equivalent to DFID, Health or Education) came to nothing, despite considerable speculation and commentary. Instead, the important thing to the MoD’s ability to minimize the level of its required savings was that it was in a position to argue successfully, over the past weeks of the Spending Review, for a commitment to no further reduction in service personnel, beyond those already under way on account of previous plans.

This in turn was a major the reason for this is that the MoD was capable of persuade the Treasury to minimize the extent of planned savings in its resource budget to £875 million, around £500 million of which was a carried-forward savings requirement due to the revised 2014/15 baseline. Some further reduction (corresponding to a 2.3% real terms reduction in total Capital DEL) was agreed within the non-equipment part of the Capital DEL budget. The MoD therefore needed to find just over £1 billion in savings in total, corresponding to 3.4% of the entire Departmental Expenditure Limit. This equated to a complete real reduction of two.0%, when measured against the revised 2014/15 baseline.   

In principle it usually is argued that, purely relating to the possible effects on overall capability, it doesn’t make sense to exclude service personnel numbers from scrutiny for possible savings. The political effect of the commitment to not make savings on this area, however, was to strengthen the case for moderation within the MoD’s overall budget settlement.

The MoD’s relative success can also have reflected a much broader Government preference for security budgets, given growing concerns over the impact of the Arab awakenings, new cyber threats, and other related issues. The safety and intelligence agencies benefited from this shift in mood, receiving real terms increases in both their capital and resource budgets. The commitment to the UN’s 0.7% target for aid have been maintained for an extra year, ensuring real terms increases for DFID (1.1% in its resource budget, 26% in its capital budget). Counter-terrorism budgets in the house Office have also been protected. Of the major security departments, only the FCO has lost out, and faces further real cuts in 2015/16 of 6.3% in resource spending and 1.8% in capital spend.

The MoD’s place within the departmental pecking order remains below those given to health and schools. As in 2010, however, it has retained a position it is a lot better than the house Office, Justice Department, local government and business. The reduction within the MoD resource budget (1.9%) is, thus, slightly more favourable than the two.5% reduction within the total government DEL resource budget.[5]

Challenges

The challenges facing the MoD resulting from the Spending Review were substantially reduced by the choice to exclude spending on new equipment procurement, around £7.5 billion of the whole budget, from the method. It’s going to, in spite of everything, was counterproductive to incorporate procurement in one year review, given MoD’s past ability to flex such spending between years. Any move on this direction, therefore, might have been step one in a slippery slope towards previous bad practices. At this Spending Review, however, the MoD has resisted this temptation.

The decision to not cut service numbers has also meant that the £9 billion of annual spending on service personnel have been largely off limits within the seek economies. Around £100 million was saved on account of the choice to restrict service pay increases to at least one%, significantly below the former planning assumption. Over again, as over the four years of the 2010 Spending Review, the call to implement a regime of real salary reductions around the public service have been an enormous cause of why capability reductions are less severe than they could otherwise had been, given the dimensions of budget cuts being made.

Because of this ‘internal ring fence’ on two key components of the MoD budget (together accounting for around 50% of total spending), other parts of the budget have needed to take reductions which are significantly higher. The total reduction against previous MoD plans, as explained above, was just over £1 billion (similar to 3.4% in real terms). However the agreed reduction in other spending (excluding service personnel and new equipment procurement) will amount to nearly £1 billion in comparison to previous plans, a true reduction of around 6% in spending in these unprotected categories. 

On the capital side, the MoD has accepted a discount of just over £200m in its plans for non-equipment spending, primarily construction spending around the defence estate.

On the resource side, there are three further main sources of savings:

• First, the MoD will take £350m from planned spending of £7.5bn on equipment support (repair and upkeep of existing kit). Here is seen as achievable at the basis of plenty of pilot studies conducted by the MoD in preparation for the Spending Review. It really is in keeping with the findings of the NAO study at the Equipment Plan, which suggested that previous MoD cost estimates at the support budget were less robust than those for equipment procurement.[6]

  Given the weaknesses in existing procurement arrangements identified within the Government’s recent White Paper,[7] it is still seen whether the prevailing Defence and gear Support organisation would be ready to deliver these savings without adversely impacting on capability. The timing of the mandatory savings implies that they’re going to must be achieved before any reorganisation, thanks to proposed reforms, is ready to be of assistance.

  The reduction in 2015/16 equipment support spending signifies that the govt is unlikely to attain 1% real growth in total equipment spending in that year. Importantly, it also lowers the baseline from which 1% real growth in equipment spending for subsequent years is calculated. The Spending Review has reconfirmed the Government’s commitment to at least one% annual real growth in equipment spending after 2015/16. The Spending Review reduction in support spending, however, suggests that the funds earmarked to satisfy the objective in 2016/17 and beyond shall be lower than they’d otherwise were.

• Second, around £100m could be saved from the £2.5bn annual budget on civilian pay. Today, it’s not expected that the reduction in civilian posts on account of this Spending Review may be greater than several hundred. This number could increase as a result further efficiencies generated by Government Procurement Service work on common goods and services (see below), or if civilian employees are transferred to other government departments as element of this process. After a period of 5 years wherein MoD civilian numbers are planned to fall by almost 30,000, reductions in this more modest scale constitute a totally significant flattening of the downwards curve.
• Third, around £300m are via be saved from greater efficiencies in spending on IT and a variety of other goods and services. Cabinet Secretary Jeremy Heywood have been closely concerned about estimating the possibility of generating such savings, using the expertise and negotiating power of the federal government Procurement Service (GPS) to take action at the MoD’s behalf. Both the MoD and the Treasury are convinced that such savings may be made. But issues remain as to how quickly such savings will be generated, and what the unintended consequences (including on military capability) can be from what’s going to be a major reorganisation. The belief is that the organisation which will control this part of its budget (i.e. the GPS) should bear the financial risk (and/or benefit) involved. But some work continues to be done to explain how this arrangement will work intimately.

The 2013 Spending Review has therefore left the MoD with a chain of challenging tasks over the subsequent two years, especially within the areas of apparatus support and non-defence-specific goods and services. By focusing required savings largely in these two areas, the MoD have been ready to protect the hot equipment budget, and to take a respite from from now on reductions in service personnel numbers. Whether or not there’s some impact on military capability due to planned efficiency measures in support spending, therefore, the result of this Spending Review have been a lot better for the MoD than might have been anticipated when it all started.  

Notes

[1] Malcolm Chalmers, ‘Mid Term Blues? Defence and the 2013 Spending Review’, RUSI Briefing Paper, February 2013.

[2] The Spending Review settlement led to a 1.9% real reduction within the MoD’s resource budget (Resource DEL) and a 2.3% cut in its capital budget (Capital DEL). HM Treasury, Spending Review 2013, Stationery Office, June 2013, pp. 10-11, 60. For discussion of the 2010 Spending Review and the MoD, see Malcolm Chalmers, ‘Unbalancing the Force? Prospects for UK Defence after the SDSR’, Future Defence Review Working Paper 9, November 2010. The end result for the 2010 Spending Review period will differ somewhat from the 7.5% plan, due to changes in spending plans (notably within the 2012 Autumn Statement) and in projected inflation rates.

[3] Malcolm Chalmers, ‘Looking into the Black Hole: Is the united kingdom Defence Budget Crisis Really Over?’, RUSI Briefing Paper, September 2011, p. 4.

[4] HM Treasury, Autumn Statement 2012, Stationery Office, December 2012, p. 58.

[5] This excludes Special Reserve Spending, by reason of fall from £1.8 billion to £1 billion. Spending Review, op. cit., p. 10.

[6] See Malcolm Chalmers, ‘Mid-Term Blues’, op. cit., for further discussion.

[7] Ministry of Defence, Better Defence Acquisition: improving how we procure and support defence equipment, Cm 8626, Stationery Office, June 2013.

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