Mind the Gap: The MoD’s Emerging Budgetary Challenge

The UK is now projected to spend 1.95 per cent of its GDP on defence in 2015/16 (£37.3 billion), excluding spending on operations – just short of the NATO 2 per cent target to which it agreed at the Wales summit.

On the current Ministry of Defence (MoD) planning assumption of modest real growth, and with the removal of £1.5 billion of one-off 2015/16 allocations, spending for 2016/17 is due to fall to £36 billion, equivalent to 1.85 per cent of GDP. In order to meet the 2 per cent commitment in 2016/17, therefore, the MoD would need an additional £3 billion. Further increases would be required in subsequent years to keep pace with GDP growth. By 2019/20, meeting the NATO target would require the MoD to be provided with an additional £5.9 billion in annual spending, compared with current assumptions.

In a context of wider austerity in public spending, such an increase is not plausible. Instead, this paper suggests two scenarios. In a pessimistic scenario, based on analysis of the spending plans of all three of the major political parties, the MoD would face a 10 per cent real-terms cut over the next four years. In its optimistic scenario, defence is given the same level of funding protection as health and schools, sending a powerful signal of increased priority for defence. The extra funds – around £4 billion per annum by 2019/20 compared with the pessimistic scenario – would probably have to be found from increased taxation and/or borrowing.

Since 2010, the bulk of real-terms cuts in spending has been felt in the personnel budget, with numbers of service and civilian personnel being cut by 17 per cent and 28 per cent, respectively. This will be harder to achieve in a further round of cuts. Planned increases in pension and National Insurance contributions, together with growing salary costs, will increase the pressure on personnel numbers. Even on the optimistic scenario, numbers of service personnel could fall from 145,000 to 130,000 by the end of the decade. Under the pessimistic scenario, they could fall to 115,000. Plans for equipment spending are also likely to be affected, especially on the pessimistic scenario. Planned spending on a successor submarine, designed to carry the Trident nuclear missile, is due to take the largest share of the forward procurement programme, and will be hard to change. If economies have to be made, air, maritime and land systems could all be vulnerable. In either scenario, the result will be a remarkably sharp reduction in the footprint of defence in UK society over a decade. Even in the optimistic scenario, defence’s share of GDP will have fallen by a third: from 2.6 per cent of GDP in 2010 to around 1.75 per cent by 2019; and the MoD workforce (service and civilian) will have fallen by around 30 per cent, from 265,740 to 184,000 by 2019.

About the Author

Professor Malcolm Chalmers is Research Director and Director (UK Defence Policy) at RUSI.