2007 Comprehensive Spending Review

 

Comprehensive Spending Review Settlement

The Secretary of State for Defence announced the Ministry of Defence's Comprehensive Spending Review (CSR) settlement on 25 July 2007, just before the summer recess.

 

The total departmental expenditure limit for defence over the CSR period will be 34 billion in 2008-09, 35.3 billion in 2009-10 and 36.9 billion in 2010-11. That is an additional 7.7 billion for defence by 2011, and a 1.5 per cent. average annual real terms increase against our CSR baseline, excluding the costs of operations that are met from the reserves and the time-limited defence modernisation fund.[1]

 

The figures quoted by the Secretary of State overstated the cash available to the MoD as they included the non-cash cost of capital charge that inflates the totals quoted by around 3 billion per year. The following table gives the 'near cash' figures.[2]

 

 

million

 

2008/09

2009/10

2010/11

Near cash Resource DEL

22,869

23,711

24,434

Capital DEL

7,871

8,187

8,871

Total

30,740

31,898

33,305

 

Real terms

In his statement the Secretary of State claimed that the CSR settlement represented an average 1.5% real terms increase over the spending review period. The Treasury uses the GDP deflator, the measure of general inflation in the domestic economy, to calculate real terms increases.[3] However, as the Treasury Committee pointed out in their report on the Comprehensive Spending Review"...this measure can be of limited value in understanding the actual effect of expenditure allocations of a particular size in particular areas, partly due to the Relative Price Effect-in other words, the movement over time of a specific price index relative to a general price index such as the GDP deflator."[4]

 

The MoD has previously provided the Defence Committee with details of the relative price effect. The last time such figures were provided was in evidence to the Committee's inquiry into the Statement on the Defence Estimates 1996.[5] Over the period 1979/80 to 1995/96 defence inflation averaged 0.7% above the GDP deflator. The Committee might find it useful to ask the MoD to calculate up to date figures.

 

Efficiency savings

The CSR settlement requires the Ministry of Defence to find cash savings of 2.7 billion by 2010/11. This figure is actually higher that the savings required over the 2004 Spending Review period (2005/06 to 2007/08) that required only 2.1 billion of cashable savings.[6] Very little detail is given as to where efficiencies are to be made. The Committee might find it useful to ask the MoD for an efficiency technical note similar to that produced after the 2004 Spending Review.[7]

 

Nuclear deterrent

The CSR settlement includes 1 billion for the maintenance of the strategic nuclear deterrent. The MoD plans to spend 800 million on the maintenance of the current system and 200 million on preserving the ability of the Atomic Weapons Establishment to "...maintain the existing warhead for as long as necessary and to enable us to develop a replacement warhead should that be required."[8] Although the government has "...committed that the renewal of the UK's nuclear deterrent will not come at the expense of...conventional capability;"[9] it might be useful if the Committee were to ask the MoD to provide a separate budget line in the estimates memoranda for all nuclear renewal related expenditure.

 

Spectrum holdings

Please refer to separate note.

 

Cost of operations

In the CSR the government gave a commitment that the "...net additional cost of military operations will continue to be met from the Reserves and provision has also been made for the continued purchase of Urgent Operational Requirements."[10] However, during the debate on the Address the Secretary of State for Defence revealed that the Chancellor's commitment came with qualifications.

 

Over the three years of the comprehensive spending review period, the reserve will continue to pay all additional costs up front and will pay outright for urgent operational requirements up to a mutually agreed total. Beyond that, the MOD and the Treasury will split the costs 50:50, with the MOD only having to repay its share two years later, by which time we will have begun to adjust the equipment programme. The Treasury has given us an extra 200 million in 2010-11 to ensure that the new arrangements are cost neutral to defence across the CSR period.[11]

 

In his evidence to the Defence Committee the Permanent Under-Secretary of State defended the new arrangements, arguing that the provision of the additional 200 million in 2010-11 would "... ensure that over the whole CSR period these new arrangements are cost neutral."[12] However, it seems that the defence budget will rise by only 100 million in 2010/11.

 

The first 100 million of the additional 200 million in the defence budget for 2010-11 was included in the MOD's capital departmental expenditure limits (DEL) announced in the comprehensive spending review. HM Treasury has agreed that a further 100 million will be added to the defence budget in 2010-11, which will bring the capital DEL funding to 8,971 million in 2010-11. There will be no change to the near cash or the non-cash resource DEL.[13]

 

In addition, the government has refused to state what the mutually agreed total, as it is dependent on the tempo of operations.[14] So, if the amount spent on UORs above the mutually agreed total over the spending review period exceeds 200 million, it would amount to a new charge on the defence budget. Even if the cost to the defence budget was cost neutral over the CSR periods a new precedent has been set that will, no doubt, be used by future Chancellors of the Exchequer.

 

Financial Information available to Parliament

Since 1997/98 the MoD has operated under three accounting regimes: cash until 2000/01; resource accounting and budgeting (RAB) stage 1 for 2001/02 and 2002/03; and RAB stage 2 from 2003/04 onwards. The introduction of RAB has not just lead to a loss of continuity in time series data, but has also reduced the amount of information available. For example, under RAB, the MoD is no longer able to separate equipment into Land, Sea and Air. Instead billions of pounds of capital expenditure is listed under single (uninformative) headings such as assets under construction or additions to intangible assets.[15]

 

The effect of RAB on the supply estimates has made it difficult for Parliament to adequately scrutinise MoD expenditure as non-cash elements, capital charge and depreciation, inflate the resource budget by 10 - 11 billion. It is therefore very difficult separate the effect of accounting changes from major (near cash) additions or reductions to top level budgets. A near cash/non-cash breakdown of information provided in the supply estimates has been produced by the MoD, but only at the instigation of individual members.[16]

 

The introduction of RAB has only compounded the difficulties that successive generations of parliamentarians have had in scrutinising expenditure. Since the War governments of both persuasions have steadily reduced the amount of information contained in the supply estimates. The first combined Defence Estimates, presented for 1964/65, are 192 pages long.[17] Today 34 billion worth of defence expenditure is dealt with in a mere 14 pages.[18] Other countries provide a great detail more information to their parliamentarians: the Australian Portfolio Budget Statement is 371 pages long; and the US defence budget justification runs to thousands of pages with extensive detail, including multi-year estimates for equipment projects. Another difficult is that the annual accounts are produced on a different basis to the supply estimates making it virtually impossible to compare the two documents.

 

The government has recognised this problem and one of the constitutional announcements made by the Prime Minister in July 2007 was a commitment to bring planning, Parliamentary approval and reporting of public spending on to a more consistent basis. The Treasury is currently working towards meeting this commitment and the Committee might find it useful to feed in its own views on the particular problems faced by scrutineers of defence expenditure.

 

A dummy estimate memorandum follows showing the type of information that should be consistently recorded to assist Parliament and the public in scrutinising defence expenditure. The suggested data is available from the MoD's accounting system or has previously been given to Parliament in answers to written questions.

 

8 January 2008



[1] HC Debates, 25 July 2007, column 865.

[2] HC Debates, 10 October 2007, column 636W.

[3] Treasury Committee, The 2007 Comprehensive Spending Review: prospects and processes, HC 54(2006/07), para. 36.

[4] Treasury Committee, The 2007 Comprehensive Spending Review, (HC 55, 2007/08). para. 8.

[5] Defence Committee, Statement on the Defence Estimates 1996, (HC 215, 1995/96), ev. 72.

[6] HM Treasury, 2004 Spending Review, (Cm 6237, 2003/04), box 13.2.

[7] http://www.mod.uk/NR/rdonlyres/3F55E015-46B5-4E14-B086-C399208B9575/0/mod_etn_051205.pdf

[8] HC Debates, 30 October 2007, column 1354W.

[9] HM Treasury, 2007 Pre-Budget Report and Comprehensive Spending Review, (Cm 7227, 2007/08), para. D8.7

[10] HM Treasury, 2007 Pre-Budget Report and Comprehensive Spending Review, (Cm 7227, 2007/08), para. D8.9.

[11] HC Debates, 12 November 2007, column 500.

[12] HC 61-ii, Q115.

[13] HC Debates, 7 January 2007, column 34W

[14] HL Debates, 13 December 2007, column WA77.

[15] DASA, Defence Statistics Bulletin No. 5 - Addendum, November 2004, para. 2.4.

[16] www.parliament.uk/deposits/depositedpapers/2007/DEP2007-0198.zip.

[17] MoD, Defence Estimates 1964/65, (HC82, 1963/64).

[18] HM Treasury, Main Supply Estimates 2007/08, (HC 438, 2006/07)