Examination of Witnesses (Questions 20-39)
MR BILL
JEFFREY CB AND
MR TREVOR
WOOLLEY CB
28 NOVEMBER 2007
Q20 Chairman: That is what the minister
told us last week. When? That was my question.
Mr Jeffrey: I would say as early
in the New Year as we are able to, given that it ought to come
after we have settled the programme and the budget.
Q21 Mr Hancock: You said there is
a need to get on with this because this kicks in in April 2008.
Are you not a bit surprised that you are still at the stage when
you are thinking about when you are going to get all this together.
Some of those decisions must have already been made, surely. Some
of those key spending decisions you must have examined and thought
through otherwise you are leaving it mighty late, are you not?
Mr Jeffrey: Spending decisions
are being taken all the time. Much of our budget is already committed;
it includes, for example, the very large staff costs of the armed
forces.
Q22 Mr Hancock: You made the point
Mr Jeffrey that inevitably there will have to be cuts made somewhere.
That is what you said when you opened up today. Here we are, four
months away from when you have to publish and have this in operation.
Surely some of those decisions must already have been made at
least in principle of the ones you are going to cut. Is that right?
Mr Jeffrey: No, it is not right.
It is not the case that there are decisions made now about planned
reductions. The process that we are engaged in is one that will
involve ministers taking decisions about the budget for the next
three years at some point in the next few months. My assessment
is that it will take us into the new year—I would guess
not very far—and at that point, to answer the Chairman's
question, while we are clear about the budget and its implications
for the equivalent programme to the extent that it does have such
implications it would be right—and the industry would expect
us—then to publish a revised version of the Defence Industrial
Strategy.
Q23 Mr Hancock: Are you seriously
telling the Committee that you have not flagged up potential savings
to the ministers yet? Presumably then, if this programme is already
in the process of being worked through, money is being spent and
will continue to be spent. You cannot really expect us to believe
that you have not flagged up those programmes because you are
going to have to make some substantial savings, are you not? We
are not talking about one or two million; we are talking about
fairly big sums of money. If we go on spending that simply because
ministers do not want to publicise that, we are entitled to know
whether you are continuing to work on programmes which you and
your colleagues within the Ministry of Defence are going to suggest
to ministers that they should be pulled, surely the idea is that
they are pulled sooner rather than later.
Mr Jeffrey: The point you are
making, Mr Hancock, illustrates the argument for doing this as
quickly as we can. What we are doing is looking at the whole programme.
We are identifying both areas where either it will be inevitable
that we spend more or we would like to spend more, for example,
on service accommodation where, if we could at all manage it,
we would very much like to spend more than is currently in our
base line. It is not the case that there are decisions already
taken about reductions that are unannounced; it is more that we
are looking at the whole thing, we are identifying, if there were
to be cuts necessary, what might the options be for doing so.
We will be putting these to ministers as early as we can.
Q24 Mr Jenkin: Can we be absolutely
clear on this. Some programmes will be increased, others may be
reduced, but overall the programme that the spending settlement
has inherited is considerably above what you now can afford under
the settlement. There is going to have to be an overall reduction
in what you were planning to spend.
Mr Jeffrey: The outcome of the
spending review includes a measure of real terms growth.
Q25 Mr Jenkin: I understand that.
If you add up all the programmes there at the moment it does not
quite match that.
Mr Jeffrey: I suspect, Mr Jenkins,
that that is always the case and it is always the case that when
a bottom up assessment is made within the department of what the
costs of the programme are, they exceed the available provision.
Q26 Chairman: So the answer is yes,
even if the answer is always yes.
Mr Jeffrey: The answer is that
every government department at this stage in the cycle, having
been told what a spending review outcome is, needs to look at
its programme in the light of that financial envelope. We are
costing it; we will need to look at areas where reductions can
take place and we will be looking, if possible, for improvements
where we can find them.
Chairman: I would like you, please, to
try to address the specific questions that are asked of you. While
your answer is absolutely true and no doubt every government goes
through this process, when you are asked a question—Are
you putting in for more than you can actually afford to spend?—it
would be helpful if you could address that question.
Q27 Mr Jones: I think that every
department that spends money looks at good housekeeping. There
is a difference between good housekeeping in terms of trying to
make sure the budget fits and actually taking strategic decisions.
As part of this process that you are going through, is it going
to be a situation whereby, for example, major equipment and choices
are going to be taken that we do not procure something but procure
extra of something else? Is it that type of exercise rather than
just counting the teaspoons in the MOD?
Mr Jeffrey: We will certainly
need to look at the equipment programme. As I know this Committee
has been made aware of before and probably endorses this, our
ministers would very much like a programme which is, if anything,
more focussed on the kinds of equipment requirements that come
out of current operations, like protected armoured vehicles, helicopters
et cetera. It would be extremely surprising if the process we
are going through did not lead to a consideration of that.
Q28 Mr Jones: That is a very good
Yes, Minister answer, Mr Jeffrey, but could you answer
the question straight? You are advising ministers; is it going
to be, like I say, just a tidying up exercise or are you going
to be recommending to ministers—which I would actually support
personally—major decisions on equipment in terms of what
you are saying, that you concentrate on this and drop certain
other programmes? In terms of making sure that in the long term
not only is the budget sustainable on procurement but actually
we could have long term confidence for industry and also the long
term confidence that we are actually buying equipment people need
and get away from some of the legacy projects which we have.
Mr Jeffrey: I apologise if I have
been Yes, Minister-ish but to be even more so, the Committee
would not expect me to talk about the advice that we have not
yet put to ministers. What I can say is that through this process
we will certainly be looking at the equipment programme. My guess
is that we will have to make some quite difficult decisions.
Q29 Chairman: The basis on which
you are making these decisions revolves around the issue that
has been discussed in defence circles for some years now, namely
defence inflation. Do you believe that defence inflation exists?
Mr Jeffrey: It is certainly the
case that some of what we buy increases in price by more than
general inflation. The most recent example of that was fuel; we
are spending a great deal more than we were even just a couple
of years ago simply because the cost of fuel has increased. Also
a lot of our staff costs, to the extent that pay settlements exceed
general inflation, and we have to find that. I suspect you are
talking more, Chairman, about equipment.
Q30 Chairman: Not particularly because
the pay settlement was 3% for the armed forces; some of the junior
ranks got something like 9% and that was verygood. Does that have
to come out of this overall increase that you have described as
a 1.5% increase?
Mr Jeffrey: It does, yes.
Q31 Chairman: So if you increase
the pay of the armed forces to that extent, the rest of the defence
budget has to find the wherewithal to do so. Is that right?
Mr Jeffrey: That tension between
pay and everything else exists in every budget in the public service.
Q32 Chairman: Of course, at the same
time as defence equipment is going up in price.
Mr Jeffrey: To come onto the equipment
point, I think it is a more complex point because if we were simply
buying the same thing year after year one could make a reasonably
straightforward judgment about whether it was inflating more than
general inflation. I gave fuel as an example a few moments ago.
The trouble with the defence area is that we are buying more and
more complex equipment and they do increase substantially in price
but it is hard to just home in and say that the inflation rate
for defence equipment is X compared with general inflation of
Y. It is certainly the case in some areas—some electronic
components, for example, office equipment and that sort of thing—where
costs have been going up probably less than general inflation.
In others there is no doubt that some of the most advanced equipment
is more expensive than its predecessors, but then again it is
more capable. It is a difficult judgment.
Q33 Chairman: You have reached a
conclusion, I think, that defence inflation is so complicated
that you cannot measure it.
Mr Jeffrey: I think we have reached
a conclusion that there is not a single measure that would make
much sense against the context that I have just described, but
we do pay attention to it.
Mr Woolley: We are working to
see whether we can come up with a robust index. It is difficult
on the equipment side because we have a mix of different types
of contract. Where we have a contract that has variation of price
clauses in it, that is to say a contract will be agreed saying
that this is the price of the contract over a number of years
and there will be an increase that is linked to some external
index of inflation, perhaps an industrial sector index, in those
cases you can say that the rate of inflation on that contract
is the rate of increase in the industrial sector index to which
the variation of price is linked. There are other types of contracts
we have which are firm price contracts, that is to say we agree
a firm price with a contractor over a number of years and in those
cases it is very difficult conceptually to say what element of
that represents actual forecast inflation. It is difficult but
it is something we are working to see whether we can get something
robust on.
Q34 Linda Gilroy: Mr Jeffrey, can you
remind the Committee what the split is between equipment and non-equipment
costs? Do you expect to see that change over the next CSR round?
Mr Jeffrey: My recollection is
that, broadly speaking, it is a budget of around £34 or £35
billion; the equipment programme is about £10 billion. I
need to check that. [1]
Q35 Linda Gilroy: Could you let us have
that?
Mr Woolley: In terms of the spend
of the defence equipment and support budget that is around £13.5
billion a year. That is on both new procurement and on equipment
support. It also includes an element for the overhead cost of
that organisation. If you are talking about defence equipment
spend in the round it is of the order of £12 to £13
billion.
Q36 Mr Jenkin: Paul Beaver, one of
our advisers, has said publicly that after defence estates, pensions
and other data the real available increase in real terms is only
about 0.9% on average. Would you recognise that as a reasonable
estimate? After you have taken out what we promised to put into
defence estates and after you have taken out what has to go into
the pensions and there are one or two other items like that, what
is available for general expenditure on defence is really a much
small increase of about 0.9%. Would that be unreasonable?
Mr Jeffrey: It is difficult to
make these comparisons. There are undoubtedly pressures within
the budget and that is what we were alluding to earlier. On the
other hand we have a continuing efficiency programme which the
Committee is aware of which points the other way. It is certainly
the case that the headline figures that emerged from the spending
review incorporate and give real terms growth on the baseline
that ministers announced at the time. On the other hand, as we
have been saying earlier, as one goes forward there are definitely
pressures there will have to be accommodated somehow.
Chairman: We will come to the consequences
of some of this later on in our questions. I would like to move
onto the nuclear deterrent now.
Q37 Mr Jenkin: Are you able to specify
a budget line for Trident replacement over the next three years
and can you tell us how much is going to be spent?
Mr Jeffrey: As the White Paper
said it is provided separately within the defence budget. The
figures in the existing baseline, as I recall, are of the order
of £200 million, £300 million, £400 million in
the three years of the spending review period.
Mr Woolley: It is about a billion
over the course of the CSR period.
Q38 Mr Jenkin: Does that actually
come of the 1.5% overall increase?
Mr Jeffrey: It does, yes.
Q39 Mr Jenkin: So there is another item
that we should really deduct from the overall increase because
the Government pledged that this was going to be funded separately
or was additional money that was going to be funded for this.
We cannot double-count the additional money, can we?
Mr Jeffrey: You certainly cannot
but on the other hand what the Government said was that it would
not be at the expense of conventional military capability.
1 See Ev 31 Back
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