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The Squeeze Continues - UK Defence Spending and the 2013 Budget

Commentary, 25 March 2013
Defence Policy, UK Defence, Europe
UK defence spending was further squeezed in the 2013 Budget announcement. It is likely to face additional cuts for 2015/16 in the 2015 Spending Review. The defence budget for subsequent years may depend on how the 2015 Spending Review shares the burden of future austerity between expenditure cuts and tax rises.

UK defence spending was further squeezed in the 2013 Budget announcement. It is likely to face additional cuts for 2015/16 in the 2015 Spending Review.  The defence budget for subsequent years may depend on how the 2015 Spending Review shares the burden of future austerity between expenditure cuts and tax rises.

Budget 2012

This year's Budget, announced on 20 March, was not good news for British defence. The Chancellor found time in his speech to announce that the armed forces would be exempt from the restrictions on progression pay introduced for civilian officials. He also confirmed that they would receive an additional 'X factor' allowance, equivalent to an extra 0.45 per cent on their base pay. But he only mentioned in outline his decision (conveyed to Cabinet colleagues the day before the Budget) to make a further 1 per cent cut in departmental current budgets, over and above those made in the December 2012 Autumn Statement.[1]

Defence Spending Cuts in Context

In order to find out what these cuts mean for defence, it is necessary to examine 'Supplementary Table 1', published separately from the main Red Book on the Treasury website. This shows that the Ministry of Defence's (MoD) resource budget (excluding capital spending) is being cut by a further £249 million in 2013/14, and by an additional £247 million in 2014/15. As with the previous round of cuts, announced in the Autumn Statement, these reductions are bigger (in absolute terms) than those for any other single government department.

Budget 2013 Supplementary Table 1

Because of recent under-spending, the MoD may be able to manage these further cuts without too much disruption to its core activities. But the lower 2014/15 budget is also likely to be used as the baseline against which the Treasury will seek to make further cuts in the 2013 Spending Review, due to conclude on 26 June. This will set the budgets for all government departments for 2015/16, the financial year due to begin in the last months of the current parliament. The Treasury is committed to find a further £11.5 billion in savings in annual current spending in the Review. The savings in welfare have already been agreed, and the Government has also protected health, schools and aid from this new round of cuts. The Spending Review is therefore focusing on other, 'non ring fenced', services, including the police, prisons, tertiary education and local government, as well as defence.

The Government has stated that, in making these further cuts, it aims to maintain the 'trajectory' of spending cuts at the same pace as during the first four years of its austerity programme. If this assumption is applied to the MoD resource budget, it suggests a reduction of around £1.55 billion in the 2015/16 allocation, compared to the level on which MoD planning is currently based. Continuation of pay restraint for a further year, announced in the Budget, will help the MoD to meet this target. The budget for equipment support (which has risen in real terms since 2010, despite a significant shrinkage in inventory) will come under further scrutiny. The MoD is also likely to have to consider further reductions in personnel numbers (both civilian and service), over and above those already being planned. Plans to stabilise regular Army numbers at 82,000 after 2014, in particular, may prove difficult to maintain. 

Defence Spending Cuts After 2015?

Nor are the reductions likely to end there. The path of the MoD budget after 2015/16 will not be determined until the 2015 Spending Review, to be held after the next General Election. But it already seems certain that budgets for the latter part of this decade will be significantly lower than assumed in the last Planning Round, because of the 'baseline effect' of cuts being made now. And, if this Government is re-elected and sticks to its commitment to continue reductions in departmental spending into 2016/17 and 2017/18, further defence cuts seem inevitable.

The further that this process continues, the more difficult it will be for the MoD to maintain the force goals for 2020 which it set itself in the 2010 Strategic Defence and Security Review. At the time of that Review, the expectation was that four years of pain would be followed by a return to budgetary stability, and perhaps even some modest growth in defence spending. But this hope has been eroded by the deterioration in the nation's wider economic position. Without a clear change in budgetary priorities, the MoD, like other 'non-ring-fenced' departments, could therefore face further real cuts in its current ('resource') budget every year until 2017/18 and even beyond.

Yet the MoD has been successful in maintaining the Government's commitment, first made in 2010, to make annual 1% real terms increases in defence equipment spending from 2014/15 onwards. The most recent MoD Equipment Plan, published in January 2013, shows that total equipment spending is due to increase by £1,152 million in 2015/16 (5.9% in real terms), with spending on new equipment due to rise by £1,055 million in this single year (an increase of 15% in real terms). Even if the MoD is required to accept a reduction in its resource budget for 2015/16 comparable to those for other non ring fenced departments, therefore, total defence spending in 2015/16 could still increase in real terms (compared to the new 2014/15 baseline set in the Budget).

As part of the negotiations leading up to the Spending Review, the Treasury may seek to reschedule the MoD's capital budget, smoothing out the sharp increase currently scheduled for 2015/16. With most procurement spending for 2015/16 already contractually committed, however, there will be limits on its ability to do so without incurring significant additional costs.

The Equipment Budget

It would be even more difficult for the Government to back down from its longer term commitment to real growth in the equipment budget after 2014/15. Most of this increase is needed in order to provide space in the budget for the growing demands of the Vanguard replacement programme, assuming that the 2016 Main Gate gives a green light for production. Although spending on this programme is not due to increase sharply until the end of this decade, the MoD needs to bring other large programmes to completion (or near-completion) before Vanguard replacement begins to dominate the procurement budget after 2020.

Spending on the programme to buy forty-eight F-35B aircraft for deployment on the Royal Navy's carriers, in particular, is due to increase sharply from 2015/16. Were this programme to be pushed to the right as part of the 2013 Spending Review, it could bring it into direct competition with future priority programmes (including both Vanguard replacement and Army re-equipment). If the Equipment Plan is rescheduled as a result of the 2013 Spending Review, therefore, it could be an early warning that the in-service date for the Vanguard replacement submarines (currently 2028, itself delayed from 2024 as a result of the last SDSR) is on track for further slippage.

Defence Spending in an Age of Austerity

Could anything mitigate what appears to be a rather gloomy prognosis for the MoD's budget? A return to pre-financial crisis rates of economic growth would clearly help. In the absence of such deliverance, the most important determinant of the defence budget in the latter part of this decade is likely to be how the 2015 Spending Review shares the burden of future austerity between expenditure cuts and tax rises.

One of the more noteworthy features of the 2013 Budget was that, even as the Treasury insisted on further last-minute cuts in spending on defence (and other non-ring fenced departments), it was able to find significant additional funds for tax cuts (raising the income tax threshold to £10,000, cutting corporation tax and freezing fuel duty), and for new government subsidies for middle-income taxpayers (notably for child care and social care).  The 2015 Spending Review could decide to change this direction, shifting a larger share of the burden of future austerity onto tax increases and/or subsidy reductions. If it does not, the next Strategic Defence and Security Review, due to take place alongside the 2015 Spending Review, could face some very tough decisions indeed.

NOTE

[1] Peter Dominiczak, 'George Osborne makes £2.5 billion more cuts to Whitehall departments', Daily Telegraph, 19 March 2013.

Author

Malcolm Chalmers
Deputy Director-General

Professor Malcolm Chalmers is Deputy Director-General of RUSI and directs its growing portfolio of research into contemporary... read more

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