Autumn Gloom: The Treasury’s Autumn Statement and the Ministry of Defence

This year’s Autumn Statement, published on 5 December, had more bad news for the Ministry of Defence.[1]  Chancellor of the Exchequer George Osborne announced savings in departmental resource budgets for 2014/15 and 2015/16, to take place in addition to the larger programme of cuts announced less than six months ago, in the June Spending Review. As in previous savings exercises (including the Spending Review itself), real spending on health, schools and development assistance has been protected. Local government, HMRC and the security and intelligence services have also been excluded from further cuts during this new round of economies. No such exemption has been granted to the MoD, which (like other non-ringfenced departments) will be expected to make an additional 1.14% cut in its resource budget for both 2014/15 and 2015/16. For the MoD, this means further reductions of £277 million and £272 million respectively in these two years.[2]

Under the new carry-forward facility which was made available in the Spending Review, the MoD will be able to use its anticipated underspend in 2013/14 to offset these reductions in 2014/15 and 2015/16 allocations. Importantly, the Treasury has also told the MoD that the reduced 2015/16 allocation will not create a new baseline for the next Spending Review: the baseline for that Review will continue to be the £23.9 billion allocated in the June Spending Review. 

Even so, MoD planners now have £549 million less money available for the next two years than they had been anticipating until a few days ago. Moreover, a proportion of anticipated underspend for 2013/14 consists of commitments that have been postponed rather than avoided. As a consequence, the decisions in the Autumn Statement may require the MoD to make further savings in previous plans for resource spending, over and above those already being programmed as a result of the Strategic Defence and Security Review (SDSR) and the Spending Review.

The 2015 Spending Review: An Early Warning?

The Autumn Statement also provides early warning as to how the MoD might fare in the next Spending Review, due to be completed in the autumn of 2015. It confirms that the Treasury is planning for further real terms reductions in total departmental resource budgets (Resource DEL) for 2016/17, 2017/18 and 2018/19, probably at around the same annual pace as between 2010/11 and 2015/16.[3]

If the government so decided, the MoD could be exempted from further real-terms cuts by being made a ‘ringfenced’ department. Yet there has been no indication from the Treasury, or from any of the leaders of the three main political parties, to suggest that such a change is likely. A more realistic planning assumption would be that the MoD will be given the same place in the government’s ranking of spending priorities that it has had since 2010. On this basis, the MoD would find itself facing further reductions in its resource budget, perhaps of the order of between 2% and 3% in real terms annually through to 2018/19.

In contrast, the MoD is still planning on the basis of maintaining its non-equipment budget in real terms after 2015/16, alongside one per cent annual real growth in equipment spending. The contrast between these ‘steady as she goes’ assumptions, and the downward spending trajectory implied in the Autumn Statement, is (at least in this respect) reminiscent of the ‘optimism bias’ that characterised defence budget planning in the two years before the 2010 Spending Review. Then, as now, the MoD assumed that it would enjoy steady real terms growth over the next decade, despite the evident need for wider economies in government spending as a whole. This assumption proved to be sadly misplaced when the results of the 2010 Spending Review – and the accompanying Strategic Defence and Security Review – were published in October 2010. 

There are some in government who believe that the 2015 SDSR (and accompanying National Security Strategy) can be a ‘steady as she goes’ exercise, adjusting existing plans at the margins but avoiding the need for difficult decisions on cutting existing capabilities or programmes. If further significant real cuts are indeed in prospect after 2015/16, this assumption may be over-complacent. Defence planners therefore need to begin to develop their thinking on what these key decisions could be, and to ensure that they have the evidence base that will be needed to ensure that the results minimise the damage to the UK's national security interests. The MoD will have to wait until after the next General Election, due in May 2015, for further formal indications from the Treasury in relation to post-2015/16 budgets. But, given the long lead times involved in much of the MoD's business, it cannot wait until then before working to develop a detailed understanding of what different SDSR choices could mean for the UK's defence capabilities. 

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