1The UK’s commitment to 2%
Background
1.UK defence expenditure has steadily decreased from an historic level of approximately 7% of GDP in 1955–56, to 3.80% in 1990–1991 at the end of the Cold War. As the graph below indicates, from 1969 until 1988 (the year before the fall of the Berlin Wall) the UK had spent between 4% and 5% of GDP on defence every year. This was substantially more than all NATO Allies except the USA. The last Strategic Defence and Security Review (SDSR) in 2010 resulted in a reduction of 8% in defence spending. This led in turn to a 20% reduction in the UK’s conventional military combat capability. In 2013, with UK GDP at £1.61 trillion and a defence budget of £37.1 billion, defence expenditure totalled 2.30% of GDP.1 By 2014, UK GDP was £1.7 trillion, the defence budget had fallen to £36.9 billion, just 2.17% of GDP, and for the first time the UK stood at serious risk of falling below the NATO minimum.
Defence Expenditure as a Percentage of GDP, 1955–2014
Sources: British Historical Statistics, Mitchell (1955 to 1975); UK Defence Statistics, DASA (from 1975 to 1990); HM Treasury, Public Expenditure Statistical Analysis 2014 (1990 to 2014); Annual GDP: Office for National Statistics
Current UK defence expenditure
2.The idea that NATO members should spend at least 2% of GDP on defence was conceived in 20062 to address the imbalance between American, British and European NATO contributions. NATO members reaffirmed their pledge to meet this benchmark at the September 2014 NATO Wales summit.
3.In his Financial Statement of 8 July 2015, George Osborne stated that the Government was “committing today to meet the NATO pledge to spend 2% of our national income on defence, not just this year but every year of this decade”.3 That commitment saw defence join the ranks of health, schools and international development as a ‘protected’ government Department with a ring-fenced budget. In addition, the Chancellor of the Exchequer announced an annual real-terms increase in defence expenditure of 0.5% until 2020–21.4
4.The Chancellor also announced the creation of a Joint Security Fund (JSF), which would offer “up to an additional £1.5 billion a year” by the end of the current Parliament. Funds allocated through the JSF to the military and intelligence have the potential to contribute an increase of 1% per year to the defence budget in real terms.5 Exact contributions to defence spending, however, will depend on successful bids by the Ministry of Defence (MoD), as other relevant Departments will also be eligible to seek funding from this source.
5.Using the criteria applied prior to the July 2015 budget announcement, the predicted UK defence expenditure for 2015–16 was £36.8 billion, equivalent to 1.97% of GDP—just short of the 2% minimum.6 Achieving the commitment to spend 2% of GDP on defence has, in part, been facilitated by revisions to the criteria used to calculate the UK defence budget that is reported to NATO.7 The UK’s revised criteria have resulted in a predicted £39 billion spend in 2015–16, equivalent to 2.08% GDP. We consider these revisions in detail in Part Two of this Report.
The Treasury Reserve
6.In Tony Blair’s 2007 speech aboard HMS Albion, he asserted that UK defence expenditure had remained roughly constant, during the decade of his premiership, at 2.5% of GDP if the costs of the campaigns in Afghanistan and Iraq were included. These costs were, however, met from the Treasury Reserve, and not from the core defence budget. In response to the Committee’s question as to whether any items previously funded from the Treasury Reserve are currently funded from the defence budget, the MoD stated that:
NATO’s aim is to capture total government spending on Defence, not just what is spent from the Defence budget itself. The core Ministry of Defence budget is therefore not the same thing as total government spending on Defence as reported to NATO. There is other government spending on Defence that is not included in the MOD budget but is within NATO guidelines of Defence spending.8
The Net Additional Costs of Military Operations (NACMO) in Afghanistan and Iraq referred to by Tony Blair were met by the Treasury Special Reserve, as are the NACMO costs associated with most military operations today.
[ … ] The MOD core Defence budget did not, and does not, meet the costs of military operations; instead additional funding is provided by the Treasury Special Reserve. These costs are included in the calculation of total UK Defence spending in line with NATO guidelines.9
In an effort to clarify the relationship between the Treasury Reserve and defence expenditure reported to NATO, the Committee asked the MoD when the inclusion of the costs of operations began. The MoD told the Committee in a written response:
The Treasury have always funded operational spending. The UK has included operational spending in its total Defence spending calculation to NATO since at least 2009, regardless of funding source.10
The Committee has been frustrated in its attempts to establish from the MoD exactly when the decision was taken by the MoD to include the costs of current operations in calculating the percentage of GDP on defence. It appears that the MoD is unable to provide a breakdown showing if operational spend was included in earlier submissions to NATO. This the Committee finds remarkable, given the magnitude of the sums involved. If, indeed, this has constituted a previous ‘shifting of the goalposts’ of defence expenditure, it may explain the sudden increase, shown on the bar graph above, between 2007–08 and 2008–09. It is a cause of concern to the Committee that the MoD has been unable to identify which years included costs of operations in its calculation of UK defence expenditure submitted to NATO, and which did not.
Future defence expenditure
7. Whilst the Government has committed to an increase in defence expenditure of 0.5% annually over the next five years, UK GDP is projected to increase by about 2.4% annually over the same period.11 Using the new calculation criteria, this implies that UK defence expenditure will fall from 2.08% of GDP in 2015–16 to 1.85% GDP in 2020–21. To fulfil the 2% commitment during this timeframe, further financial contributions will therefore be required: £2.7 billion in 2019–20, and £3.5 billion in 2020–21.12 The Government has indicated13 that this deficit will be remedied by an additional inclusion of intelligence funding, given that a significant proportion of annual expenditure from the Single Intelligence Account (SIA), which funds the UK intelligence agencies, is in support of military activities. Further sums from the new £1.5 billion Joint Security Fund should secure the 2% minimum until 2020, assuming that such an accounting strategy falls within the NATO guidelines.
8.The trajectory of defence expenditure for the near future is set out in the 2015 Comprehensive Spending Review. Details of the Joint Security Fund remain unclear, and will be subject to negotiation: whilst the MoD and Intelligence Services may be primary beneficiaries of the JSF, the Foreign and Commonwealth Office (FCO) will also be eligible to bid for its security-related activities. Thus, the exact amount available to defence is hard to predict.
9.Ultimately, key strategic issues face the UK. The nature and breadth of these have altered significantly since the 2010 SDSR, and their assessment is important in determining the funding required. The protection now given to defence results, in part, from increased strategic risks. Britain has historically enjoyed “the luxury of a warfare away game”.14 The deterioration in relations with Russia and in European security since 2010, as well as the persistent and evolving threat from international terrorism and the conflicts in Africa and the Middle East, have all increased the pressure and requirement for enhanced defence resources.
Is the UK expenditure of 2% of GDP sufficient to safeguard UK defence?
10.The 2010 SDSR aimed to ‘secure Britain in an age of uncertainty’.15 The UK arguably now exists in a world even less certain than in 2010. The 2015 SDSR includes a commitment thoroughly to review current defence capabilities, deficiencies and potential remedies. The Government asserts that its new 0.5% annual increase in defence expenditure will be sufficient to fund its manifesto commitment to increase the annual MoD equipment budget by 1%, and maintain the Regular Army at 82,000 personnel.16 A key question, however, is whether this is sufficient to maintain effective defence of the UK. With limited resources, ‘full-spectrum capability’—and the ability of the UK to engage internationally—may not be achievable.
11.We welcome the Government’s commitment not to fall below the NATO recommended minimum of spending 2% of GDP on defence each year for the rest of the current Parliament. This sends an important message to all the UK’s partners and potential adversaries. We recognise, nevertheless, that meeting the minimum—at a lower proportion of GDP than ever before—does not mean that defence is adequately resourced, following decades of successive cuts in expenditure. We also note that the NATO minimum would not have been fulfilled if UK accounting practices had not been modified, albeit in ways permitted by NATO guidelines.
12.We would like further clarity regarding the nature of operational funding from the Treasury Reserve. That the MoD has been unable to provide a robust data set identifying which years included costs of operations in its calculation of UK defence expenditure submitted to NATO is a concern to the Committee; we invite the MoD to do so.
1 International Institute for Strategic Studies, The Military Balance 2015, February 2015, Chapter Four: Europe
5 Malcolm Chalmers, ‘Osborne’s Summer Surprise for Defence’, RUSI Briefing Paper, July 2015, p 2
6 Malcolm Chalmers, ‘Osborne’s Summer Surprise for Defence’, RUSI Briefing Paper, July 2015
7 Ministry of Defence Annual Report and Accounts 2014–2015, HC 32, London Stationery Office, 16 July 2015, p 143; Malcolm Chalmers, ‘Osborne’s Summer Surprise for Defence’, RUSI Briefing Paper, July 2015
11 Office for Budget Responsibility, ‘Economic and Fiscal Outlook’, November 2015, Table 4.1
12 Malcolm Chalmers, ‘Osborne’s Summer Surprise for Defence’, RUSI Briefing Paper, July 2015, p 5
13 Malcolm Chalmers, ‘Osborne’s Summer Surprise for Defence’, RUSI Briefing Paper, July 2015, p 5
14 General Sir Richard Barrons, Commander Joint Forces Command, RUSI Land Warfare Conference, July 2015
15 HM Government, ‘Securing Britain in an Age of Uncertainty – The Strategic Defence and Security Review’, Cm 7948, October 2010
16 Malcolm Chalmers, ‘Osborne’s Summer Surprise for Defence’, RUSI Briefing Paper, July 2015, p 3
© Parliamentary copyright 2015
20 April 2016