Ministry of Defence

Potential £20 Billion Spending Shortfall At MoD, NAO Report Finds

The National Audit Office has calculated a minimum affordability gap of just under £5 billion.

Ministry of Defence

The Ministry of Defence’s ten-year Equipment Plan is "not affordable" and is not realistic, a National Audit Office (NAO) report has found.

The research suggests that the MoD's forecast of spending on equipment and support 2017-2027 is not realistic compared to costs the department will face.

Spending under the Equipment Plan is projected to be £179.7 billion, including a £6 billion contingency.

But even after assuming the contingency will be used, the NAO has calculated a minimum spending shortfall of £4.9 billion.

The report suggests there is an extra potential affordability gap of £15.9 billion, if all risks of cost growth materialise and the department does not achieve savings assumed in the Plan.

The total potential affordability gap could be £20.8 billion (the minimum £4.9 billion plus the additional potential £15.9 billion), says the NAO.

Sir Amyas Morse, head of the National Audit Office, said today:

"The department’s Equipment Plan is not affordable.

"At present, the affordability gap ranges from a minimum of £4.9bn to £20.8bn if financial risks materialise and ambitious savings are not achieved."

The Ministry of Defence has responded - a spokesman told Forces News:

"We have just launched the Modernising Defence Programme to ensure our Armed Forces have everything they need to defend the country from intensifying threats across the globe.

"We have already saved almost £5bn in efficiencies while making sure our military have the best equipment available and taxpayers get value for money."

The MoD went on to say that the report's overall potential affordability gap of £20.8 billion reflects what they describe as "the wholly unlikely and unrealistic situation where all Equipment Plan financial risks materialise and the MoD achieves none of its efficiency and savings measures".

The Chief of the Air Staff, Air Chief Marshal Sir Stephen Hillier, said "there will always be cost pressures":

Main findings of the report:

£4.9 billion - this is the minimum spending gap faced by the Ministry of Defence, the National Audit Office has calculated.

£20.8 billion - but this potential figure could be nearly £16 billion higher if savings are not made and costs go up, according to the NAO.

£179.7 billion - the amount the MoD has budgeted for equipment and support spending 2017-2027.

£9.6 billion - excess forecast costs, calculated by the NAO and not included in the MoD's Equipment Plan.

Type 31e BAE design
A maximum price of £250m per Type 31e frigate has been set by the government. (Image: BAE Systems)

The NAO’s review found that the department has understated forecast costs by at least a further £1.3 billion as the planned cost of buying five Type 31e frigates are not included in the Plan, while the cost of nuclear-related projects continues to grow.

General Sir Richard Barrons, Former Commander Joint Forces Command, said:

'We have reached the point where we have stripped so much out of defence over the last 25 years or so, since the end of the Cold War, that there's really nothing that you can't cut that doesn't absolutely really matter."

The National Audit Office report highlights what it says are significant risks to the cost of the Equipment Plan: over-optimism in forecast costs of £3.2 billion, and the risk of £4.6 billion in increased costs relating to foreign currency exchange rate changes.

According to the NAO, the Ministry of Defence reports that it has achieved savings of approximately £7.9 billion against an increased savings target of £16 billion, with approximately £8.1 billion still to be achieved by 2027.

However, the report states there is a lack of transparency on the full amount of savings included in the Plan and the department does not have evidence to support all the savings it has claimed to date.

The NAO report also found that the MoD has not included £9.6 billion of forecast costs in the Plan.

This variance arose as a result of the department's 2017 budget setting process not being able to match costs to available budgets.