LONDON — The British government’s budget watchdog says a newly published Ministry of Defence ten-year equipment plan is affordable but fails to account for the country’s difficult economic situation.
“While the plan continues to serve a useful purpose in reporting to Parliament on planned expenditure, the volatile external environment means this year’s plan is already out of date,” the National Audit Office said in its report on the 2022-2032 defense spending plans released by the MoD on Tuesday.
The government expects defense equipment spending would total £242 billion ($290 billion) over the next ten years, compared to an estimated £238 billion ($285 billion) in last year’s program.
“The department faces significant and growing cost pressures which will have an immediate impact on its spending plans,” auditors wrote. “The department believes it can manage these pressures but has left itself limited flexibility to absorb any cost increases on equipment projects, or across other budgets.”
The equipment plan is based on data submitted by the end of March this year and does not take account of the impact of exchange rate changes, rampant inflation, fuel costs and the Russian invasion of the Ukraine.
The MoD, though, says its plans remain relevant.
In a foreword to the equipment plan Defence Secretary Ben Wallace acknowledged there were difficulties ahead on equipment spending.
“The plan is not immune to risk, we have set ambitious savings targets and made hard decisions in spending priorities across the commands,” he wrote. “We are confident, however, that the capabilities we are investing in, and spending decisions made in the last year, remain in line with the developing defense landscape and ensure we have a stable financial footing for this and future plans,” said Wallace.
Just how relevant the plans will be going forward remains to be seen.
In September, then-Prime Minister Liz Truss commissioned the MoD to reconsider the details of an integrated review published 2021in light of changing security circumstances.
That work continues under the new government of Prime Minister Rishi Sunak and Chancellor Jeremy Hunt and is expected to be complete during the first quarter of next year.
The outcome of the review will dictate if, and when, the government finds additional money for the MoD to reflect the global security situation following Russia’s invasion of Ukraine.
Truss had promised the MoD an increase in defense spending from the current level of 2.1% to 3% GDP by 2030, but Britain’s dire financial position has thrown a shadow over the spending pledge.
“Before we make that commitment it is necessary to revise and update the integrated review, written as it was before the Ukraine invasion,” Hunt told Parliament Nov. 17 while delivering what is known here as the Autumn Statement.
But the equipment plan warned that without the extra cash the MoD would need to take an axe to capabilities and programs.
“Without additional funding it is clear that difficult decisions will be required to reduce the scope of the plan and funding profiles may need to be reshaped to align the delivery of key military equipment with objectives,” said the MoD document.
As it is, defense leaders are optimistically hoping to realize savings of over £13.5 billion ($16.2 billion) to balance the books on the equipment plan.
Most of those savings are based on the MoD renegotiating existing commercial contracts.
Auditors believe it is clear the MoD is facing significant and growing cost pressures and has left itself limited flexibility to absorb cost increases across equipment and other budgets.
The MoD will need to make difficult prioritization decisions to live within its means and retain enough flexibility in its plan to respond promptly to changing threats, said the NAO.
Moves have already been put in place to mitigate some of the cost pressures, including introducing changes to commercial policy to manage the impact of inflation.
“We are making greater use of index-linked, fixed-price contracts to prevent firms from either applying high premia on firm price bids or not bidding entirely. We are also ensuring early engagement with key suppliers to discuss how inflation will be treated in future contracts, including our view of what is reasonable for payroll costs,” said the MoD plan.
“Similarly, our unreserved contingency funding will also aid in offsetting some of this pressure,” it said.
Constraints across industry may also influence the ability of the MoD to keep programs and budgets on track.
The NAO said budgets shareholders in the MoD are beginning to report supply chain risks and industry capacity constraints, including skills gaps and, more recently, an increased demand for defense equipment in other countries.
This trend, they said, will likely make delivering projects within existing schedules and budgets more difficult.
Andrew Chuter is the United Kingdom correspondent for Defense News.