Four-year MoD settlement ‘not decided in a vacuum’, insists Treasury perm sec

Tom Scholar tells MPs preparation work for delayed integrated review of defence, security and foreign affairs fed into multi-year funding boost
Tom Scholar appears before the Public Accounts Committee on 19 November 2020

By Jim Dunton

20 Nov 2020

Treasury permanent secretary Sir Tom Scholar has told MPs that the four-year funding settlement announced for the Ministry of Defence should not be viewed as separate from the ongoing integrated review of the UK’s foreign, defence, development and security policy.

Scholar’s assurance came as he and two top Treasury colleagues were grilled by members of parliament’s Public Accounts Committee on the MoD package, announced yesterday – days ahead of next week’s single-year spending review.

MPs were exasperated that although prime minister Boris Johnson and defence secretary Ben Wallace had briefed details of the settlement, worth an additional £24.1bn to the MoD over the full four-years, officials felt unable to discuss it ahead of the formal announcement in parliament. The uplift includes £16bn of new funding over the period.

PAC chair Meg Hillier said it was “wholly unsatisfactory” for the committee to be able to read about the settlement in the media but be unable to discuss the details with senior government officials responsible for ensuring the money is being spent correctly.

Chancellor Rishi Sunak had been due to conduct a multi-year comprehensive spending review until the plan was cancelled last month because of uncertainty surrounding the coronavirus pandemic. Covid-19 also prompted the integrated review to be paused and it is now not due to conclude until next year.

The MoD’s funding includes a commitment to boost the UK’s cyber-defence capability, with the creation of a new agency dedicated to artificial intelligence and a National Cyber Force, combining officials from the UK’s security and military services. The government is also developing a new Royal Air Force Space Command, capable of launching its first rocket in 2022.

But MPs questioned the merits of agreeing a four-year funding package for the MoD before the integrated review had concluded, when the ministry’s funding priorities had yet to be finalised.

Committee member Richard Holden asked the session’s officials –  who included HMT director general of public spending Cat Little and director for public spending Vicky Rock as well as Scholar – whether the move was “putting the cart before the horse”.

“Should the integrated review have come first and then the money?” he asked.

Scholar rejected the basis of the question.

“We’ve been working across government on the integrated review for months,” he said.

“It’s not as if the defence settlement has been decided separately, in a vacuum, outside that context. It’s been decided completely within that context. So I don’t think that the premise of the question holds.”

Hillier asked Cat Little, who joined the Treasury earlier this year after serving as director general for finance at the MoD, whether allocating money to departments without knowing what it would be spent on was what the Treasury liked to see.

“There have of course been decisions on how money will be spent,  as we have with every single part of the spending review settlement,” she said. “But I cannot comment on the detail, despite my previous role and my intimate knowledge of the defence budget.”

In relation to the timing of the funding settlement ahead of the integrated review’s conclusion, Little said: “I don’t think it’s my position to judge the sequencing of defence and security policy”.

OBR ‘set to confirm’ soaring public debt levels

Elsewhere, Scholar was asked about the impact of the coronavirus pandemic on the public finances. He responded with a particularly stark assessment of what the Office for Budget Responsibility’s latest analysis is expected to show when it is published alongside the review next week.

“On the basis of information already available, we’ve all got a fairly good idea of what that’s going to show,” he said.

“The Bank of England in their forecast a week ago said that they expect the economy in 2020 to have contracted by 11% compared to the previous year which is the biggest annual contraction in 300 years.”

Scholar said that partly as a consequence of the lower economic activity, partly as a consequence of all of the support provided through either additional spending, tax cuts or tax deferrals, there would be a “very, very significant impact” on the fiscal position.

“Back in March the OBR was expecting public sector net borrowing this year of about 2.5% and a debt level  at the end of the year of about 75%,” he said.

“We’ll know the precise numbers next week, but in their monthly estimates in August – I think it was – the OBR were projecting borrowing this year of something like £370bn or 19% of GDP.

“So that’s increased from 2.5% of GDP to the high teens and a debt level not of something like 75% but of over 100%, something more like 105% – a very significant hit to the fiscal position.”

Scholar said the key issue for government ministers was trying to balance the need to support the economy against the need to look at long term fiscal sustainability.

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