By Joshua.Chambers

08 Aug 2012

The Ministry of Defence says it’s balanced its budget, and can now afford to honour all its spending commitments. But as Joshua Chambers reports, this has come at a cost both to personnel and to equipment programmes.

On May 14 the secretary of state for defence, Philip Hammond, announced that for the first time in 30 years, the Ministry of Defence (MoD) has managed to balance its budget: its current spending plans will eliminate the £38bn gap between its income and its financial commitments over the next ten years.

“I find it rather incredible that an organisation could exist for 30 years and not balance its budget. And people must have known there was a problem”, Jon Thompson, the department’s finance director, told an audience at Civil Service Live last month. The situation persisted, he said, due to a “lack of bravery to tackle the problem.”

To squeeze £38bn out of its spending plans, the department has had to implement significant spending cuts. Thompson said that, first off, the MoD has looked to find easy efficiency savings – putting in place a 10-year plan to reduce back office costs. This included renegotiating contracts, and changing the way in which inflation is calculated on long-term contracts.

There were also significant reductions in personnel. Overall, the armed forces are being reduced by 30,000 – with 11,000 being made redundant, and the rest intended to be lost through natural turnover. The army is facing the biggest staff losses, shrinking by 20,000 people – from 100,000 to 80,000 – over the next ten years. And on the civil service side 28,000 will lose their jobs; something that Thompson admitted makes him “slightly nervous.” The final number of civil servants that the department will retain has not yet been fully determined, he said; the MoD needs to work out exactly how many staff it needs to meet planned military commitments and the outputs set out in the Strategic Defence and Security Review.

Finally, savings were also made by reducing the armed forces’ spending on equipment. Until this year, forces chiefs bidding for new kit could treat every project as an isolated case. But now they’re forced to explain which are the most important to them, so that ministers can make appropriate funding decisions. “Almost every single organisation I’ve worked for has been clear about how it is prioritising capital investment, but for the Ministry of Defence this was a major step forward,” Thompson said.

However, there are some risks to balancing the budget. First, the MoD is planning to spend money on three large programmes over the next ten years: renewal of the nuclear deterrent; the F35 Joint Strike Fighter; and new Type 26 Frigates. The F35 programme has already repeatedly run into financial difficulties, and all three programmes are the kind of military project that, in the past, has incurred delays and seen costs rise. Estimated expenditure may not match reality, so more savings may be necessary to balance the budget.

Further, the spending cuts necessary to reduce the budget deficit are having a big impact on staff morale. Thompson admitted that last year the MoD’s staff engagement survey showed very low morale.

Finally, it’s very difficult to predict future military conflicts, while former military figures have repeatedly warned in the newspapers that the cuts are weakening some of our military capabilities. An audience member put this to Thompson, who responded that military spending will remain above two per cent of GDP throughout the spending review and beyond: in terms of cash spent, our forces will remain the fifth best-funded in the world. And leaving Afghanistan will allow British troops to be more flexible, he said. He admitted that there will be a reduction in capability over the next eight years; but ultimately, that decision has been made by ministers. Britain will just have to hope that the government’s predictions of its military requirements over the next eight years prove to be accurate.

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