Examination of Witnesses (Question Numbers
60-79)
MINISTRY OF
DEFENCE
Q60 Mr Bacon: To start with, I would
just like to go back to this gap, where the Chairman started,
Sir Bill. As I understand it, the gap in terms of the procurement
budget in ten years' time will be £6 billion if the MoD assumption
of 2.7% growth in the budget is maintained for each of the next
ten years. Then in ten years' time the gap would be £6 billion;
is that right? That predicates my next question.
Sir Bill Jeffrey: Not quite, is
the answer to that question. First of all, these figures relate
to the whole Defence Programme and not just to the Equipment Programme.
Q61 Mr Bacon: When you say the whole
Defence Programme, you mean the whole defence budget?
Sir Bill Jeffrey: Yes.
Q62 Mr Bacon: So if I take the defence
budget and I grow it by 2.7% for ten years—2.7% each year—I
get to a number which is £6 billion less than you would need
to fulfil your procurement requirements?
Sir Bill Jeffrey: Which brings
me to the second point I was going to make.
Q63 Mr Bacon: Sorry, is that right?
Sir Bill Jeffrey: Only if by 2.7%
growth you mean an addition to the cash figure each year by 2.7%.
Q64 Mr Bacon: It is probably best
to ask the National Audit Office about this.
Sir Bill Jeffrey: We are not talking
about real terms growth.
Q65 Mr Bacon: Let me just clarify
this with Mr Banfield. What is the number that grows by 2.7% each
year and in ten years' time results in a £6 billion shortfall?
Mr Banfield: It is an increase
of 2.7% each year cumulatively.
Q66 Mr Bacon: In the?
Sir Bill Jeffrey: In the cash
figure.
Mr Banfield: Yes.
Q67 Mr Bacon: In the cash figure
of the entire defence budget?
Mr Banfield: Yes. So we go from
the end of the current Spending Round—
Q68 Mr Bacon: If I grow that at 2.7%
for ten years I end up with a number which is £6 billion
less than required for?
Mr Banfield: For the defence budget.
Q69 Mr Bacon: For the procurement
bit or for the whole thing?
Mr Banfield: For the whole thing.
Q70 Mr Bacon: And if it is flat then
I am £36 billion adrift?
Mr Banfield: Yes.
Q71 Mr Bacon: Sir Bill, 2.7% growth
is 27 times larger than the current growth of the economy, which
is 0.1% we heard yesterday. So you are not going to get 2.7% per
year for the next ten years, obviously. What are you going to
do?
Sir Bill Jeffrey: This is why
rather tiresomely I drew out the point that we were talking about
a 2.7% cash increase. It is not a real terms increase. That base
assumption, which I agree is questionable given the general economic
conditions, simply assumes that there is a general provision for
inflation in the underlying provision each year; in other words,
that the defence budget does not grow in real terms at all. That
compares, for example, with the last ten years in which it has
grown, in real terms in addition to inflation, by about 1% per
year or so—a little more than that in some years. So in
the jargon that we tend to use internally that scenario is "flat
real". It means that you preserve the purchasing power on
a very general assumption about inflation.
Q72 Mr Bacon: The 2.7 is flat real?
Sir Bill Jeffrey: Yes. It also
means, incidentally, that the Defence Programme—
Q73 Mr Bacon: I am sorry, my question
is: given that you are not going to get that—and it is blindingly
obvious that you are not going to get that because even flat to
real, 2.7% is 27 times larger than the present growth of the economy,
as of the announcement yesterday—what are you going to do?
Sir Bill Jeffrey: Ten years is
a lengthy period and the alternative assumption that the NAO Report
offers, which is so-called flat cash—in other words, we
reduce year by year the size of the Defence Programme by a couple
of percentage points or so, between 2% and 3%.
Q74 Mr Bacon: Hang on. Mr Banfield,
I understand flat cash to mean the money they have now they continue
to get in cash and no more—it is what is used to be called
cash limits in the early 1990s; is that right? So that means that
you have the same amount of money that you had but because of
defence inflation and stuff you end up practically having to cut
things.
Sir Bill Jeffrey: Not because
of defence inflation, because of general inflation.
Q75 Mr Bacon: Because of inflation
anyway, which we hear is worse than—
Sir Bill Jeffrey: The £36
billion—and the Comptroller and Auditor General knows that
I would have preferred it not to be cited in this Report—
Q76 Mr Bacon: I bet you would!
Sir Bill Jeffrey: --- because
it makes a pretty arbitrary assumption about a very long period.
The £36 billion assumes that—
Q77 Mr Bacon: Hang on a minute! You
would have preferred it not to have been cited because it makes
an arbitrary assumption about a pretty long period. What it actually
does, surely, which is what you are uncomfortable about, is that
it holds your feet to the fire and says, "Here are the consequences
of your present spending decisions, either if spending remains
where it is now or if it does not even grow in line with inflation."
That is all it does; and that is useful information for Parliament
and the public to have.
Sir Bill Jeffrey: One could speculate
about—
Q78 Mr Bacon: What you have been
doing for years is robbing Peter to pay Paul and ducking and hiding
and weaving with apparently the connivance of the Treasury, because
the Treasury seems to have been au fait with what you have
being doing, and the thing that this Report has done, and which
caused such a stir when it was published, is made things clear.
That is all it has done, has it not?
Sir Bill Jeffrey: My only point,
Mr Bacon, is that the £36 billion figure assumes that year
by year for the next ten years the real purchasing power of the
defence budget reduces by between 2% and 3% and there is no provision
at all for general inflation, pay increases—nothing. I do
not know whether that is a realistic assumption or not, but to
work round to the answer to your original question: what we do
is we have a Defence Review.
Q79 Mr Bacon: It just describes the
extremes, the two bookends, the parameters—
Sir Bill Jeffrey: Precisely.
Mr Bacon: And that is actually useful
information. Obviously nobody expects it to be £36 billion
because you will take decisions which will mean that it will not.
But it describes in a way that I think is quite helpful for the
general public and for debate and for Parliament the universe
within which you are operating. But the fact that you did not
want it to be cited I thinks tells us a lot about the way you
have been doing business for years and years.
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