House of Commons - Spending Review 2010

Spending Review 2010 - Treasury Contents

4 Spending

Ringfencing

39. The Coalition Agreement included several commitments that effectively 'ringfenced', or protected, spending programmes against cuts during the Spending Review. Examples of those commitments included:

A guarantee that health spending would increase in real terms in each year of the Parliament, while recognising the impact this decision will have on other departments.
The decision to restore the earnings link for the basic state pension from April 2011, with a 'triple guarantee' that pensions are raised by the higher of earnings, prices or 2.5%.
The decision to protect key benefits for older people such as the winter fuel allowance, free TV licences, free bus travel, free eye tests and prescriptions.
The commitment to spend 0.7% of Gross National Income (GNI) on overseas aid from 2013, and to enshrine that commitment in law.[66]

We were keen to assess the impact of such ringfencing on the Spending Review process. We particularly looked at two departmental budgets that were effectively 'ringfenced' in the Spending Review process—Health and International Development. Our aim was not to replicate the scrutiny of the responsible departmental select committees, but to inform our understanding of the Spending Review process, and the effects of ring fencing on overall government expenditure decisions.

INTERNATIONAL DEVELOPMENT

40. The commitment to spend 0.7% of GNI on overseas aid from 2013 was reflected in the spending envelope agreed for the Department for International Development (DIFD). Table 3 from the Spending Review 2010 outlines how that commitment will be met, with the main increase occurring in 2013-14. As well as this increase in the department's budget, the Spending Review notes that "DfID will become a leaner organisation with a focus on managing aid efficiently and effectively, by significantly reducing back office costs. Running costs will account for only 2 per cent of total spending by 2015, compared to a global donor average of 4 per cent".[67] Mr Simon Maxwell, Senior Research Associate, Overseas Development Institute, told us that "It is clear that DFID will suffer a 30% cut in its head count as a result of savings on headquarters cost, so it will have to do things differently".[68]

41. Aid spending can be used to support wider policy objectives. We note that the Spending Review said that one of DfID's priorities would be to "improve the coordination and performance of British development policy in conflict countries, in line with the [Strategic Defence and Security Review] SDSR, with particular focus on Afghanistan and Pakistan. 30 per cent of ODA will be used to support fragile and conflict affected states by 2014-15".[69]Table 3: Department for International Development budget

£ billion¹

2010-11 2011-12 2012-13 2013-14 2014-15

Resource DEL 6.3 6.7 7.2 9.4 9.4

Capital DEL 1.6 1.4 1.6 1.9 2.0

TOTAL DEL 7.8 8.1 8.8 11.3 11.5

Departmental AME 0.1 0.1 0.1 0.1 0.1

¹ In this table, Resource DEL excludes depreciation and AME excludes non cash items

Source: HM Treasury, Spending Review 2010, p 60, Table 2.15

42. When we asked whether DFID could manage the rapid increase in spending in 2013-14, Mr Maxwell replied that:

That will not be until 2013, by which time DFID and the international agencies with which it works will have had time carefully to think about how to spend the money. There will be a number of options open to all parties at that point. The first is to channel more through the large, multilateral agencies that we already support, including particularly the International Development Association of the World Bank—the soft loan window of the World Bank which will have a replenishment about then. We can also channel more money through other multilaterals, including the regional development banks, and, if DFID wishes to, it could increase the level of budget support and programme aid that it provides to countries for projects that are relatively less staff-intensive and easier to manage than small-scale projects.[70]

43. Unlike Health, which we discuss below, public support for ringfencing international aid is not universal. In their Report Aid to Developing Countries: Where does the UK public stand, the Institute for Development Studies presented evidence that "63 per cent of respondents expressed the view that spending on aid to developing countries should be reduced as part of efforts to address the UK budget deficit".[71] Mr Maxwell acknowledged this difficulty, but responded that:

Of course, it would be preferable if 63% of the population said they wanted to maintain the aid budget, rather than the reverse. It is a question of how the argument is made, and there is a very strong attachment to the voluntary sector in the UK. For example, during the last Comic Relief, at a time of recession, contributions went up by over 50% compared with the previous Comic Relief. So, when people see the human face of international development and are told about the successes, they can be convinced. But it is a job for political leaders to tell the story in such a way that, as was done in 2005, a million people were brought on to the streets in support of Make Poverty History.[72]

HEALTH

Table 4: Department for Health budget

£ billion¹

2010-11 2011-12 2012-13 2013-14 2014-15

Resource DEL 98.7 101.5 104.0 106.9 109.8

Capital DEL 5.1 4.4 4.4 4.4 4.6

TOTAL DEL 103.8 105.9 108.4 111.4 114.4

Departmental AME -2.0 -1.6 -1.0 -0.4 -0.2

¹ In this table, Resource DEL excludes depreciation and AME excludes non cash items

Source: HM Treasury, Spending Review 2010, p 43, Table 2.2.

44. Table [4] shows the Department for Health's budget as set out in the Spending Review. The Spending Review states that this "settlement increases overall NHS funding in real terms every year, with a total increase of 0.4 per cent in real terms over the Spending Review period—meeting the Government's commitment on health spending".[73] Meanwhile, as with DFID, the Spending Review also noted the need for efficiency within Health spending. The Spending Review stated that "The NHS will need to make efficiencies to deal with rising demand from an ageing population and the increased costs of new technology".[74]

45. The Institute for Government pointed out that a series of apparently optimal spending decisions could lead over time to a sub-optimal distribution of resources:

Three year cash spending plans are a sensible idea in most circumstances, and were indeed thought to be a major step forward over annual settlements. But they produce unplanned expansions in real spending if stuck to in a deflationary recession. If subsequently a government feels politically obliged to commit to protect these areas, irrespective of how well they have fared relative to other areas (as arguably the new Coalition government did with the ringfences on health, aid and commitments to pensioners), we can end up with a radically different structure of public spending to anything which we would have consciously planned. This may be because we never stand back and take a look at the cumulative impact of individual decisions and ask whether that is the outcome we want.[75]

Several of those who provided written evidence considered it wrong to ringfence departments, such as health, which had received large real increases in the recent past. Policy Exchange stated that in a world where spending had "risen too fast because of very large rises in particular departments [...] the least painful way to cut back spending would be to cut it in the areas where it has risen the most. (Of course, some cuts elsewhere might also be necessary.)"[76] They provided the following example from health to illustrate their point:

By way of illustration (without recommending a particular figure at this point— which we see as fruitless), if health spending had been cut by 10% then that would have left it, in real terms, still above its 2007/8 level. We do not believe that Health was regarded as significantly under-funded in 2007/8, and we note that real GDP in 2010 will certainly be smaller than it was in 2006. Such a cut would have reduced cuts in other departments by around £10bn—clearly allowing scope to avoid significant cuts in defence and allowing lower cuts in many other departments that had not previously experienced large rises.[77]

When we asked Mr Appleby whether he thought there could be a backlash against the Health settlement, he replied:

No, I am sure that there are people in other spending areas and other departments who are looking over the fence and thinking, "Well, the NHS has had it pretty good for the last 10 years or so, and it's not suffering as well". But again I suspect that that won't happen too much, because the NHS still reflects some values that people have. I have to say that people value health, pound for pound, probably more than certain other areas of other public spending.[78]

46. However, there were signs in the Spending Review of the Health ringfence being slightly porous. The Department of Health settlement noted that there would be "an additional £1 billion a year for social care through the NHS, as part of an overall £2 billion a year of additional funding to support social care by 2014-15".[79] As well as this, as part of its commentary on the Spending Challenge, the Spending Review stated that "The Government will aim to break down the barriers between health and social care funding through new approaches including reablement services provided by the NHS".[80] A letter from the NHS Chief Executive to NHS Executives noted that "there will be a further redistribution of £1bn by 2014/15 from capital to revenue specifically to support greater integration between health and social care".[81]

OVERALL CRITICISM OF RINGFENCING

47. Several less department specific concerns about ringfencing were expressed in the written evidence we received. Reform noted that ringfencing may mean spending is not effectively allocated, and provided the following example:

Cutting an extra pound of spending from, say, community services to protect a pound of spending on health will only maximise the national interest if the pound of health spending provides greater value than the pound of spending on community services. It is highly debatable that this is true for every single pound of health spending.[82]

A similar argument was raised by NIESR:

Prior to the election we argued that if existing spending plans were properly balanced then the case for ringfencing did not exist. Spending on each part of the government should perhaps be seen as an optimisation exercise where marginal social benefits, whatever they may be, are the same across spending departments. This means that a cut would have the same costs wherever it was applied. If the crisis has left us worse off compared to where we thought we would be (a permanent loss of output) then spending plans need to be re-evaluated. On top of this we need to ensure the fiscal costs of the crisis are paid off through a fiscal consolidation programme. It is perhaps unwise to start discussion with what should be ringfenced. Ringfencing some areas has meant that cuts have had to be deeper in others, and the incremental costs of those cuts in terms of loss of benefit to society could be large.[83]

48. Some evidence argued that ringfencing was inequitable to those departments not in the ringfence. In its written evidence, the New Local Government Network stated that:

The Government's decision to ringfence and partially ringfence budgets across the public sector has undermined the equity of the spending review. The question is not whether any parts of public spending should be prioritised, but the method by which this has been done.

The impact of the protection of specific domestic budgets has been that local government has had to shoulder the largest budget reductions after the Treasury (not itself responsible for frontline service delivery) and Defra. NLGN's analysis in summer 2010 demonstrated that by protecting major spending departments such as the Department of Health, budget cuts were being passed onto other departments.[84]

And the British Chamber of Commerce in their written evidence stated that:

Business did not support this politically-motivated and ill-considered decision, as its outcome was to further squeeze spending that supports growth (e.g. transport infrastructure) and jobs (e.g. housing and training).

Later decisions to partially ringfence both education and defence spending, which became clear when the Review itself was published, further exacerbated this situation. While we are well aware that private-sector contractors gain substantially from Government spending in both these areas, there was no opportunity to weigh up whether these ringfences would have negative effects on 'growth spending' elsewhere.[85]

49. Reform also expressed a concern that ringfencing meant that officials in those ringfenced departments might feel "that they are insulated from the need to deliver reform and efficiency".[86] This was an area we explored in our hearings with experts in differing spending areas, the pressure for evidence of effectiveness was often brought forward. For instance, Professor Taylor, an expert on defence, argued that "I think the aid budget needs better to be justified not by the input, which is the share of GDP or share of Government spending that goes to aid, but by the outputs and outcomes that it generates". Mr Maxwell provided us with a defence of the effectiveness of aid spending:

I don't think that anybody working in the development business would say that we want to be unaccountable for results. We look at the growth rates of countries, the reduction in child malnutrition, the improvement in health status and the number of people receiving antiretroviral treatments. And our guide for the past decade has been the millennium development goals, which were passed by the UN General Assembly, with, I might say, strong British leadership in 1990. We are on the road to achieving some of those goals in some countries—not all of them in all countries.[87]

However, Professor Taylor noted "The MOD is quite widely measured as to whether its procurement projects come in on time, and whether its military operations are carried out successfully. I am not sure that the same scrutiny is given to how effectively the aid budget is spent. I would like to see a firmer assessment of outcomes from aid spending, and use that as a guide to what level of resource it should be given".[88]

50. The risk that ringfencing might lead to poor oversight of protected departments was highlighted when Mr Hudson was asked which department settlements he had taken a key interest in, indicated welfare, health, education, local government and BIS and noted that perhaps health "given the ringfence, attracted less debate than it has done in previous years" though "it was nonetheless important".[89] The Chief Secretary denied that ringfencing had led to less scrutiny of the ringfenced departments during the Spending Review process:

I spent a great deal of time with Andrew Lansley, and there was considerable engagement at official level. It is true that there may have been other budgets that consumed more time, but that doesn't mean that proper attention wasn't given to the health budget. There certainly was. We sought to identify areas—some of which we set out in the spending review document—to give priority to, such as provision for social care. We sought to identify the proper balance between resource and capital spending within the health budget, so I think we gave proper attention to it, not least of course because there is a substantial programme of structural reform going on in the NHS. Ensuring that the interactions of that reform and the money we are allocating were properly thought through was an important part of the spending review process.[90]

51. Overall, the Chief Secretary defended the decision to ringfence as follows:

The approach we took in the coalition agreement, setting out what our political priorities were, was the decision to ringfence the health budget with small increases in real terms, as you've seen in the spending review, and to make a political commitment on international aid. Those were important statements of the coalition's political priorities. In that sense, it was very similar to decisions we made in our own manifesto, setting out our own political priorities. As Liberal Democrats, we set out a commitment to spend more in certain areas and less in others. It was simply a way of showing the political priorities that we are seeking to deliver through the spending review. In fact, in the case of the health service in particular, it does not in any way—as some of your previous evidence has shown—remove the need to make efficiency savings and changes within the NHS budget, given that even with the very small increments in real terms that we have set aside in the spending review, it is a considerably more challenging settlement than the Department of Health has received in past spending reviews.[91]

52. Ringfencing may fulfil electoral promises. But ringfencing can also lead to allocative problems across government as a whole. It could also reduce scrutiny of ringfenced departments. The decision to use the NHS budget to purchase social care and the DfID budget to support fragile and conflict-affected states shows that ringfencing has not been absolute and the Treasury should not be afraid to demand that spending currently ringfenced in certain areas be used where the benefit is the greatest, or where greater value for money can be obtained.

Defence

53. We also looked at the Defence settlement. We wished to see how the very public disagreements over defence expenditure affected the Spending Review process. Moreover, the effect of the contract to provide aircraft carriers demonstrated a potential mismatch between Government spending plans and long-term contracts.

LEAKS

54. On 28 September 2010,the Daily Telegraph published a leaked letter from the Defence Secretary to the Prime Minister over the Defence review.[92] We explored the effect of the leak on the Spending Review. We asked Lord Turnbull as to his 'best guess' as to how the leaked had occurred. He replied:

I think that the letter was written to be leaked. This was not a letter that a Secretary of State, who is engaged in negotiation, would write to the Prime Minister, with whom he has been discussing detailed figures and how he could do this and how he could do that. It was very much going back to square one—a lot of rhetoric. It looked to me like something written to reassure the constituency that the Secretary of State was fighting hard for their corner.[93]

55. Our defence expert witnesses were divided as to what impact the leaked letter had had on the Review process. While they all noted that they had no inside information, Professor Chalmers told us that his impression was that the leaked letter "didn't make a lot of difference".[94] Dr Cornish though disagreed, telling us that he thought "that the letter did have a huge impact publicly and across Whitehall".[95]

AIRCRAFT CARRIERS

56. The decision to continue with the purchase of two aircraft carriers caused a great deal of comment at the time of the Strategic Defence and Security Review. Concern was expressed at the period of time the UK would be without a carrier-based fixed-wing aircraft capability, and at the fact that cancelling one aircraft carrier and proceeding with only one may have cost more than proceeding with two carriers.

57. These carriers will cost around £5 billion.[96] Only one will be operational, while the other will be placed at 'extended readiness'.[97] The operational carrier will now have catapult and arrestor gear installed, which will allow greater interoperability with US and French carriers and naval jets, but will delay its arrival in-service from 2016 to around 2020.[98] This change will also mean that the carriers can carry the carrier variant of the Joint Strike Fighter, which the Strategic Defence and Security Review noted "will be cheaper, reducing through-life costs by around 25%", while the aircraft themselves will have "a longer range and greater payload".[99] These decisions have to be seen in the wider context of related defence spending cuts. The Strategic Defence and Security Review stated that Harrier jets are to be withdrawn from service in 2011,[100] and that HMS Ark Royal will immediately be decommissioned.[101]

58. The Strategic Defence and Security Review (SDSR) noted that the UK would only need to operate one aircraft carrier.[102] The Prime Minister, in his statement on the SDSR, revealed that the previous Government had though "signed contracts so we were left in a situation where even cancelling the second carrier would cost more than to build it. I have this in written confirmation from BAE systems."[103] We therefore questioned both officials and ministers on how the Government had tried to negotiate its way out of the aircraft carrier contract. Mr Richardson assured us that "the question of 'could you break the contract' was looked at. Not surprisingly, however, the people who build aircraft carriers do not build them on spec. This is not something that you can build and then just hope that a buyer will turn up".[104] He then provided further detail as to the alternatives that had been considered:

It became clear that it wasn't possible to get out of the contract. It would have been possible to have done alternatives. It would have been possible not to have built the carriers and to have built other ships instead. But that would have been less good value for money, and in the end, the judgment was that the carrier strike force was part of the long-term strategic needs; that, looking 10 to 20 years ahead, this was something that would be part of the adaptable posture that we have adopted and, therefore, that we would go ahead with building the carriers. But there were alternatives and those were considered but they were thought, in the end, to be less good from a strategic military perspective and less good from a value-for-money perspective.[105]

59. The Chief Secretary provided the following explanation as to why the contract had continued:

What became apparent was that we had an arrangement with two elements. One, of course, was the contract to build the carriers. The second was the terms of business arrangement that exists with the dockyards, where a decision had been taken—not a decision we sought to overturn—that we wanted to retain the capacity to undertake naval shipbuilding in the United Kingdom, and therefore if we had decided to stop building the carriers we would have had to replace that work in those shipyards with other work that was not as far advanced as the carriers and would not have met our strategic defence needs as a country. We and our officials spent significant time, on my instruction, looking in detail at the contracts to make absolutely sure that what we were being told by the [Ministry of Defence] was correct.[106]

60. In response to our questioning on the aircraft carriers, the Treasury published the confirmation from BAE referred to by the Prime Minister, in a letter to him from Ian King, Chief Executive Officer of BAE Systems.[107] The letter provided further details on the costs of cancelling one carrier. If both carriers were completed the stated cost would be £5.25 bn. If the Prince of Wales was cancelled, BAE said the direct cost would be £4.86 bn, plus an additional £690 million of consequential costs. The letter also warned that the loss of a second carrier would precipitate the closure of at least one BAE Systems shipyard, and 2,500 job losses in BAE Systems in Scotland and the South East, as well as several thousand in the wider supply chain. The Chancellor told us that this was "of all the problems we faced, probably the greatest."[108]

61. It is argued that the aircraft carrier contract was unbreakable not just for legal reasons, but also because it was inextricably linked to the strategic need to maintain a stable supply of work for the sole warship-producing supplier in the UK. The National Audit Office will, no doubt, examine this intensively. In evidence to the Liaison Committee the Prime Minister agreed to look into the matter and provide this Committee with the maximum amount of information possible. When we have seen this information we may decide whether and how best to undertake further work. The Treasury should draw on the lessons from the contract to analyse all future Ministry of Defence procurement to ensure that value for money is being obtained, particularly when little competition exists in the market.

REVIEWING DEFENCE SPENDING

Speed

62. In their Report, The Strategic Defence and Security Review, published in September 2010, the Defence Committee concluded that "the rapidity with which the SDSR process is being undertaken is quite startling. A process which was not tried and tested is being expected to deliver radical outcomes within a highly concentrated time-frame. We conclude that mistakes will be made and some of them may be serious."[109] The National Security Strategy was released on 18 October 2010, the Strategic Defence and Security Review on the 19 October, and the Spending Review was released on 20 October. In his written evidence Professor Taylor warned that:

The SDSR of 2010 should not be compared with the 1998 exercise SDR because the latter sought to identify and introduce important improvements to the MoD's structures and processes: the creation of the Defence Logistics Organisation, the Equipment Capability Customer and the Permanent Joint Headquarters were examples. The five months allotted to the SDSR process was insufficient for any similar effort, hence the separate treatment of a Defence Industry and Technology Policy and of the Defence Reform effort under Lord Levene.[110]

63. However, despite the speed with which the process was undertaken, some of those from whom we took evidence appeared comfortable with the result, as Dr Cornish told us:

We have to bear in mind that the NSS and the SDSR, the whole process, was, as they say, pushed to the wire. It was being reviewed in all sorts of ways and at all sorts of levels almost up to the day of publication. As I said earlier, I really can't tell whether there was a causal influence at all. I'm guessing that there was. I go back to my earlier point: in the end, the outcome of the process was reasonable, intelligent and stable enough for the time being.[111]

And Professor Chalmers noted that:

RUSI conducted a survey just after the review among members of the foreign security policy elite, and one of the questions we asked them was whether they felt the Government had struck the right balance, in terms of resource allocation, between the need to make savings generally in Government spending and the allocation to defence. Interestingly, the majority of our respondents said they felt the Government had struck the right balance in relation to defence spending.[112]

64. The Spending Review is not the end of the Government's reform programme for defence spending. In a speech in August, the Defence Secretary announced that "To ensure oversight and implementation of this programme, I am today setting up the Defence Reform Unit. A heavy hitting Steering Group of internal and external experts will guide the hard thinking and challenge preconceptions. I have asked Lord Levene to Chair this Group and I am grateful for his acceptance." [113]

Over-commitment of future defence spending

65. The National Audit Office has noted that the Ministry of Defence repeatedly over-commits its budget. They stated that:

At the end of the last two spending rounds, the Department's over-committed plans have led to budgetary pressure in the new financial year. This has led to additional savings being necessary. During 2009-10 the Department had to find additional savings of £800 million in year to bring its planned expenditure back into line with its budgets. Finding further savings mid-year is a time-consuming and de-stabilising exercise. Many areas have to revisit or adjust their plans leading to delays, material changes to project specifications, and costly renegotiation of contracts with industry.[114]

In evidence to us, the Chief Secretary said that "We came into office with a defence budget with a £38 billion projected overspend," a point previously made by the Prime Minister in his statement on the Strategic Defence and Security Review.[115]

66. Professor Taylor was concerned that this prior commitment meant that short-term cuts would be made from areas that could be cut, rather than needed to be cut. He referenced a July 2010 National Audit Office, which stated that:

The Defence plans require a longer horizon than Government spending plans and are relatively inflexible. Long timescales are required to develop and field modern military capabilities with defence plans extending up to 20 years when compared against typical spending reviews at two to three year intervals. Decisions taken at any given point in time create long term commitments and liabilities, with up to 75 per cent of the budget committed in the next financial year to long term capabilities and people, reducing gradually thereafter.[116]

When we pressed Professor Taylor, he provided the following description of the impact of having only a small part of the budget immediately available for cuts:

The MOD model for generating capability involves eight lines of development: training, equipment, logistics, doctrine and so on. Many of those lines of development are under long-term contracts, particularly equipment. The carriers are a case in point. Some others, particularly elements of training and recruitment, are not subjected to the same long-term commitments, so one can expect the MOD to be pushed to make savings in areas in which it does not have those long-term commitments. Therefore, you'll have some areas of capability not being generated when, perhaps, they should be. That is my anticipation. I cannot see how that can be avoided easily if you have to take a 4% cut in the defence budget out of, perhaps, a 30% total available to be changed.[117]

67. We discussed with witnesses how this tendency to over-commitment, stemming from the different periods over which defence and the Treasury were monitoring spending, could be tackled. Professor Taylor provided us with a strong case for reforming the acquisition procedures of the Ministry of Defence:

The whole area of acquisition—as I would prefer to put it, rather than simply procurement—is something that needs further attention. We can see that, in the past, the level of technological ambition that the MOD has sought from its weapons systems in its requirements has been a contributing factor to the cost escalation and to the difficulty of predicting just what these new systems were going to cost. I hope that that is something that would be reviewed.[118]

68. Dr Cornish noted that work was under way with papers "coming out on the whole defence industrial strategy [...] next year".[119] He also noted that Treasury had worked closely with the National Security Council and all other Government departments on the recent defence reviews.[120] He argued that "the spending cycle at three or four years is out of kilter with an acquisition cycle that could take five or ten years, or perhaps even longer. There is no doubt that improvement is needed in the MOD, but it is also important to secure more flexibility and adaptability within the Treasury".[121] He felt that the use of 'urgent operational requirements' were "regarded by the Treasury as a bit of a scam and by the MOD as a desperate measure to get something that you need on time. One would hope that, from both sides of the discussion, we could move away from that sort of process".[122]

69. Professor Chalmers thought that the over-commitment of the Ministry of Defence's budget had meant that the Treasury had had to become more involved in the Ministry of Defence. He explained that:

If there was a situation where it felt that the MOD was managing its priorities within the budget available, [the Treasury] would probably be more inclined to stand back, but that has not been the case in the recent past.

He added that this is "an issue of over-commitment, but it's also an issue of wasting money by making commitments, which we then can't afford to fulfil".[123]

70. Our witnesses suggested two different, but not necessarily incompatible, responses to the need for changes to the acquisition process. Professor Taylor told us:

I would like to see requirements that can be developed more quickly, so that they are more short-term requirements. They would then contain less technological risk and we would have a better chance of them coming in on time. There is some sympathy for this sort of argument in some parts of the Ministry of Defence. My shorthand argument is that, normally, we should not approve a project unless it's planned to come into service within five years. I emphasise "normally". That should be the normal rule. There are hints in the review that the Government might be more drawn towards this sort of thinking, and I think that will help with the procurement scene—to get the requirements a little more modest.[124]

He noted though that "If it [the MOD] went for shorter term contracts, they would be more expensive because companies would be taking on more risk that the contract would be cancelled—therefore, they would have to take that into account in their prices".[125] Professor Chalmers called for a longer-term budget for the Ministry of Defence, helping it to plan further in the future, and better matching the profile of its spending commitments:

Where I think there is room for more thought in coming months is whether to take up the suggestion, to which the previous Government committed, of having a 10-year equipment budget, which is well beyond the spending review process and therefore creates problems for the Treasury. That would be more in keeping with the sort of time scales that procurement, and indeed defence capability planning more generally, deals with. It is worth while in that respect to look at the lessons of Australia and Canada, both of which have 20 to 25-year indicative budgets for defence, which can then be used for the planning of their long-term capabilities. There is a parallel with transport in this country, which has a 10-year capital programme, and which of course gets revised at spending reviews. There is a whole set of issues there.[126]

71. The Government inherited an over-committed defence budget. Successive governments have tried and failed to deal with over-commitments. The major concern of the Committee is the interaction between the Treasury and the Ministry of Defence over how defence acquisitions, and day-to-day funding, is agreed. In many cases, it may be sensible to accept that the high costs of short-term contracts are offset by the increased flexibility they give. There will however be some long-term projects which cannot be planned within the confines of the Spending Review, as these are in the programmes of many spending departments. The MoD has a poor record of dealing with such contracts. These continuing difficulties suggest that the level of scrutiny given to these contracts by the central departments is not sufficient to prevent serious blunders in procurement.

Afghanistan

72. Operations in Afghanistan continue. The Strategic Defence and Security Review noted that "the Government is fully committed to ensuring that the campaign is properly resourced, funded and equipped".[127] The Spending Review 2010 noted that "the Treasury remains committed to funding all the net additional costs of military operations in Afghanistan from the Special Reserve".[128]

73. Such an important and necessary commitment has a significant impact on how defence spending is allocated.

74. UK military personnel engaged in ongoing operations in Afghanistan must have the necessary equipment. But such operations must not overly colour the shape of defence spending after their expected end.

66 HM Government, The Coalition: our programme for government, Back

67 HM Treasury, Spending Review 2010, p 61, para 2.98 Back

68 Q 206 Back

69 HM Treasury, Spending Review 2010, p 60, para 2.97 Back

70 Q 205 Back

71 Institute of Development Studies, Aid to Developing Countries: Where does the UK public stand, September 2010,
p 2 Back

72 Q 233 Back

73 HM Treasury, Spending Review 2010, p 43, para 2.11 Back

74 HM Treasury, Spending Review 2010, p43, para 2.21 Back

75 Ev 40 Back

76 Ev 19 Back

77 Ev 19 Back