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How the Tories created a defence funding crisis

8 min read

Labour MP and former Defence Minister Kevan Jones says years of rushed through defence spending cuts and bad decisions have now come home to roost.

The debate around defence spending has crept towards the top of the country’s political agenda. 

In a speech to RUSI last week, the head of the Army, General Sir Nick Carter, warned that the UK’s ability to respond to new threats would be eroded without further investment.  The general was candour about the source of these threats with Russia being mentioned on no less than twenty-six occasions.

General Carter’s warning comes amidst accusations that the Government has failed to allocate enough money to pay for new equipment and capabilities, creating a £20 billion funding gap and a bleak financial position within the Ministry of Defence.

The National Security Capabilities Review, launched last summer, was in part designed to address the MoD’s budget difficulties, but has also fuelled media speculation that additional cuts could be on the way.  Responding to this, a number of Conservative backbenchers including Sir Michael Fallon, the former Defence Secretary, have called for defence spending to be increased.

The new Defence Secretary, Gavin Williamson, has now been allowed by the Chancellor to oversee the military element of the review which will pit him against a Treasury looking to further squeeze the MoD’s budget.  

In a statement to Parliament last Thursday, Williamson outlined a rough draft of a plan with a primary focus on making the Ministry of Defence more efficient.  It is in essence a rear-guard action designed to hold the Chancellor at arm’s length and stave off cuts to the armed forces and planned equipment programmes.

But the Defence Secretary is playing a risky game. If he fails to prevent further cuts, or doesn’t secure extra real terms cash demanded by Tory backbenchers, the Government could face a revolt. Meanwhile the armed forces and wider defence community are set for an uncertain few months.

How did the Ministry of Defence get into the funding crisis it now faces?

In 2010 the new Conservative-led Government implemented a series of deep cuts to the armed forces.  The justification for this as claimed by the then Defence Secretary, Liam Fox, was that he had inherited a so-called ‘£38 billion black hole’ in the MoD budget from the previous Labour government in which I served as a Defence minister.

However, Fox’s 2010 claim of a £38 billion black hole has never been properly justified, even when the National Audit Office and House of Commons Defence Committee tried to check it. 

In fact, the figure was made up, and relied on a crude interpretation of a 2009 National Audit Office report on major defence projects started under the Labour government.

The report took a snapshot of in-year cost increases reported in 2009, primarily associated with the Queen Elizabeth Class aircraft carrier, A400M transport aircraft and Astute Class submarine programmes.

Assessing the implications for the defence budget, the National Audit Office said that only if there was absolutely no increase in cash terms over a ten year period, which was highly unlikely, would a worst-case funding gap of £36 billion emerge.    

The ‘£38 billion’ figure used by Liam Fox included personnel costs, which were presumably added on for further headline effect. 

Fox ignored the NAO’s other, most likely, scenario which said that if the defence budget remained constant in real terms a potential funding gap would grow to £6 billion over ten years.  A much more manageable figure.

But the then Defence Secretary fabricated a myth that £38 billion needed to be immediately found from the MoD’s budget.  In doing so, Fox disregarded the fact that the MoD’s deficit was nowhere near that amount and that the NAO had outlined a range of projected forecasts, which included the worst-case scenario he seized upon. 

Pushed further by the media to justify the ‘£38 billion’ claim, the MoD said it was not prepared to give a detailed breakdown explaining exactly how that figure had been reached.

However the £38 billion claim stuck, becoming folklore, and was repeated by journalists, ministers and Conservative MPs time and again.

Two years later, Philip Hammond, who took over as defence secretary following Fox’s resignation, then suddenly stated to Parliament that the ‘£38 billion black hole’ had been eliminated.  If this had been true, it would have been a remarkable feat to achieve in less than two years.

When questioned on exactly how this had been achieved, Hammond refused to release specific details citing national security and commercial sensitivities, using a convenient cloak available to defence ministers to evade parliamentary scrutiny.  This was a deliberate attempt to hide the Government’s creative accounting and disingenuous use of the NAO’s audit responsibilities for political gain.

It is against this backdrop that the seeds of the present crisis facing defence spending today were first sown.

Essential military capabilities were abandoned without replacement and thousands of professional personnel and their skills were lost in the name of the ‘£38 billion black hole’.  This figure was used by the Government as a smokescreen for cuts that led to a reduction of over 20,000 personnel from the Army alone.

Between 2010 and 2015 the Ministry of Defence's budget fell by 16 percent according to an analysis carried out last month by the House of Commons Library. This is an indictment on Tory backbenchers’ claim that the Conservatives are the party of defence.

If Labour had raided the defence budget in a similar vein there would have been outcry from the Tories.  Yet during these times the vast majority of Conservative MPs stayed silent, disinterested in defence, or drunk on the Kool-Aid of Cameron’s austerity agenda.

On top of slashing the defence budget, the Government’s October 2010 decision to delay the renewal of Trident, undertaken for political reasons to patch over a Tory-Lib Dem coalition rift, cost a minimum of between £1.2 billion and £1.4 billion with the likely total cost being far greater.

Then came the pre-Brexit 2015 Strategic Defence and Security Review which announced a £24.4 billion spend on new equipment, bringing the total amount pledged by the Government on defence equipment and support to £178 billion.  A significant portion of this money was destined for projects designed to fill the very capability gaps created by the Government in 2010.

Included within the 2015 SDSR were plans to purchase a raft of costly US-made equipment, including P-8 maritime patrol aircraft and Apache helicopters.  Combined with the existing plan to buy 138 F-35B fighters, this means that a significant part of the UK order book for new kit is in dollars. Fluctuations in the value of sterling following the UK’s decision to leave the European Union risk increasing the cost of equipment purchased in foreign currency.

The 2015 SDSR was conducted in tandem with a Government Spending Review in which tight spending controls were imposed on all departments by the then Chancellor, George Osborne. 

To pay for the equipment plan, the SDSR committed the MoD to find efficiency savings and generate unachievable cash returns from land sales.  In spite of his recent change of heart, Michael Fallon, who had taken over as Defence Secretary from Philip Hammond in 2014, endorsed this strategy. At the time, a range of commentators familiar with the MoD questioned the realism of such a plan and ministerial optimism that it would be achieved.

The Treasury continues its resolve that efficiency savings, as outlined in the SDSR and agreed at the time of the 2015 Spending Review, will continue to fund the purchase of new equipment.

Chancellor Hammond, according to some, will not easily give in to any plea by Mr Williamson for extra cash, as he feels the military already receive a generous settlement within the constraints set by his predecessor.

However, the Commons Defence Select Committee has said that the Ministry of Defence will struggle to find the £7.3 billion in savings required to pay for the new hardware.

Speaking in December, the committee’s Conservative chair, Julian Lewis, warned that it is “extremely doubtful” that savings alone can pay for the Government’s planned equipment.  Michael Fallon, now on the backbenches and writing recently in the Telegraph, also admitted that the efficiency savings on which new equipment depended proved harder to deliver than anticipated.

The Government’s line that ‘we have a growing defence budget’ has become unstuck.

Yesterday the National Audit Office released a damning report which said the Government’s Equipment Plan is unaffordable. The NAO also highlighted the alarming fact that the MoD has not accounted for £9.6 billion of forecast costs in its plan, nor has it included the £1.3 billion required to buy five Type 31e frigates.

Decisions taken by the Conservatives in government have led to today’s funding crisis facing defence. Philip Hammond and Liam Fox occupy senior positions in Theresa May’s Cabinet and yet face little criticism for the role that they played.

Years of rushed through cuts and bad decisions have now come home to roost.

What is clear is that the funding crisis facing defence is a mess of the Conservatives own making.

Kevan Jones is Member of Parliament for North Durham and was a defence minister the previous Labour Government.  He was Shadow Minister for the Armed Forces between May 2010 and January 2016.  He is Chair of the APPG for Shipbuilding.

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