Does the defence review add up? The head of the RAF has today given us an important insight into the maths. He has made public that David Cameron’s vision for the armed forces in 2020 is only affordable if you assume the MoD budget rises every year after 2015 by around 2 per cent above inflation.
For those of you who don’t think it sounds much, a five-year military settlement as generous as that was last granted in the early 1980s.
Is the rise a realistic basis for planning? A prudent approach? Should we really count on a military spending boom after 2015?
This review was, after all, supposed to balance the MoD books. Yet it looks like we’re back to buying kit on the never-never. Officials tell me the cumulative unfunded liability — if you take the usual planning assumption of the budget rising in line with inflation after 2015 — stands at £13bn to £15bn over the coming decade.
Coalition aides say this is completely different from the “black hole” they say they inherited from Labour. It all comes down to this statement given by the prime minister in the Commons:
“My own strong view is that this structure will require year on year real-terms growth in the defence budget in the years beyond 2015.”
On the basis of this “strong view”, Liam Fox’s team think it is realistic and reasonable to at least plan on the basis of real terms increases to cover their spending commitments. Defence chiefs also welcomed Cameron’s “strong view” of the future — but they are still pushing for a more “bankable” pledge. They want George Osborne to guarantee an annual uplift beyond 2015, a request that some Treasury officials will treat as light comedy. I don’t think such a guarantee has ever been given to a department.
So is this actually a funding black hole? Well, even if the Treasury did break the habit of centuries and give a guarantee, it would still carry big risks. What if the economy performed badly? Or Cameron lost the election? Or the public decided in 2016 that education or health were more deserving of money than defence?
On top of that, there is the issue of whether the MoD vision is accurately priced. If history has taught us anything, it is that defence costs always overshoot official expectations. Financial optimism is the one resource the MoD is not short of.
So given all this, there is a good case for being cautious and assuming a flat real budget, which is standard practice at the MoD. And if you do that, then Cameron has left the MoD a big unfunded liability. It is less than the £38bn left by Labour, but big nonetheless.