Paying for People in Defence

Investing in people: Royal Marines of Bravo Company 40 Commando pictured during an exercise in Cyprus. Image: Defence Imagery / OGL v3.0

After a long period of real-terms cuts in UK service pay, the government may be changing tack. But how will this be financed?

The government’s acceptance of the report of the 2023 Armed Forces’ Pay Review Body (AFPRB) clearly signalled that it recognised the need to give increased priority to service pay and conditions. This message was reinforced in the Haythornthwaite Review of workforce incentivisation and in the Defence Command Paper Refresh (DCPR). As Defence Secretary Ben Wallace stated in the foreword to the Paper,

'Our strategic advantage … is derived foremost from our first-class people – our real battle-winning capability – in whom we are determined to invest: in their accommodation, their skills, and their overall employment offer.'

The initial price tag for the AFPRB recommendations was substantial: £862 million extra spending on service pay, pension contributions and allowances in 2023/24 (p. 55). This is an increase of almost 8% in the cost of service personnel, much higher than the 3.5% increase for which the Ministry of Defence (MoD) had initially made provision.

The manner in which the MoD plans to fund this extra spending, amounting to some £500 million in the first year, is especially significant. The Treasury had made it clear that, like other government departments, the MoD would have to find savings from within its own budget to pay for the extra costs of the AFPRB recommendations. But, in a relaxation of its previous approach, it agreed that the MoD could shift £500 million from its capital budget to finance the extra costs of the pay settlement. Other reported offsetting savings – for example, a longer-term freeze on civil servant recruitment or a drastic curtailment of training activities – proved to be inaccurate.

Pay Matters

This decision, along with the policy direction set in the DCPR itself, suggests that the recent shift in overall Defence priorities towards capital spending may be unlikely to go much further.

The Ministry of Defence’s ability to use real-terms cuts in service pay as a source of savings may be running out of road

The Spending Review in November 2020 announced a £24 billion increase in defence spending, equivalent to annual real-terms growth of some 1.8% per annum over five years. But all these extra resources were to be devoted to capital spending, filling the funding gap in the equipment plan. The Chancellor’s Spring Budget in March 2023 then announced a further £5 billion for defence over the next two years, most of which was also for capital spending. Even after the reallocation to the pay budget, MoD real-terms capital spending is therefore due to rise by 56% between 2019/20 and 2023/24. Day-to-day resource spending, in contrast, is set to fall by some 3%.

But the MoD’s ability to use real-terms cuts in service pay as a source of savings may be running out of road. Like the rest of the public sector, service personnel (and MoD civilians) have seen successive below-inflation settlements in most years since 2010 – producing a cumulative increase in salary levels of only 17% between 2010 and 2022. Over the same period, between September 2010 and September 2022, consumer prices increased by 38%.

Recent surveys of the attitudes of armed forces personnel show growing dissatisfaction with pay levels. The pay review body reported increased concern over pay compared with previous years (p. 36). It is becoming harder to retain experienced personnel, both regular and reservist. The generosity of the pension offer has, in the past, helped to offset a less competitive base salary, especially for more experienced personnel. But this can only go so far in addressing immediate cost-of-living concerns, with some analysts suggesting that a shift in public sector remuneration from pensions to take-home pay would lead to greater employee satisfaction and retention. The MoD also faces continuing concerns over other aspects of the offer, with a significant proportion of service family accommodation not fit for purpose (p. 83).

The need for the MoD to make a competitive salary offer to its personnel will be increased by its commitment to prioritise the upskilling of its workforce, and to provide more opportunities for personnel to move back and forth between the private sector and the military in their careers. The DCPR emphasises, in particular, the need to attract ‘people with skills and experience acquired prior to joining’ and the attractiveness of ‘zig-zag or portfolio careers’, in which people move back and forth between Defence and other employers (p. 17). This makes sense as a framework for ensuring that Defence can recruit and retain the very best talent in the country, able to take advantage of new technologies and ways of working. But it will make it even more important that the remuneration offer for Defence is competitive with its private-sector comparators.

The war in Ukraine has brought home the urgency of investing in near-term conventional warfighting capabilities

The DCPR makes clear that its increased focus on people does not mean that current numbers of service personnel should be maintained. Indeed, the focus on upskilling the defence workforce, along with the separate chapter on productivity, strongly suggests further reductions in personnel numbers – both regular service and civilian – over time. The DCPR hints at this with its argument (p. 19) that

'This flexibility of service across a whole force will change the way we think about the ‘size’ of our Armed Forces. For too long, headcount has wrongly been seen as a proxy for outcomes with the size of the regular forces taken as a totem of our national military prowess.'

The war in Ukraine has also brought home the urgency of investing in near-term conventional warfighting capabilities. The 2010 and 2015 reviews took risks with shorter-term preparedness in order to invest in capabilities that would only come on stream a decade or more later. Faced with the increased threat from Russia, in contrast, the DCPR has emphasised that the military needs to be ready to fight now. This means more capital investment in munitions and spare parts. It also means more focus on training and readiness, so that Defence is ready to respond at the speed of relevance to whatever unexpected challenges emerge.

Taken together, all this means that it will be hard to further increase the proportion of the defence budget that is devoted to long-term capital projects, especially if total defence spending is unlikely to grow rapidly as a result of wider fiscal constraints. As a result of the 2020 Spending Review, and the 2021 Integrated Review that followed, the capital budget has already increased substantially. But this has been, in part, at the expense of investing in readiness and in people. The DCPR has signalled that the government recognises the need for a course correction.

Defence Review Implications

The next major defence review – expected after the next general election – will be the place to make long-term judgements on the right balances between capital and resource spending, and between people and equipment, for the coming decade. But, if the election does not take place until October 2024, some further decisions will be needed before then. Decisions on the next annual public sector pay settlement will be needed by summer 2024. For the MoD, this will include deciding whether to repeat this year’s decision to use capital savings to cover a more generous pay settlement. The Treasury will also have to decide on the total 2025/26 budget allocation for Defence, and other departments, by November 2024. Before the full defence review, therefore, there are likely to be further opportunities to see whether the course adjustment set in the DCPR is being embodied in future plans.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.

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Malcolm Chalmers

Deputy Director General

Senior Management

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