The Ministry of Defence (the Department) has published its Equipment Plan (the Plan) each year since 2013, setting out its intended investment in equipment and support projects for the next 10 years. The Department assesses whether this is affordable within its future budget. The Committee remains extremely concerned that the latest Plan was again unaffordable, with the funding shortfall potentially as high as £17.4 billion between 2020 and 2030. The Department also faces significant additional cost pressures—estimated to be more than £20 billion—to develop future military capabilities that are not yet included in the Plan. This is highly destabilising for defence and must not continue. The Committee has highlighted serious affordability issues year after year and, while the Department has made some improvements, it has not yet established a reliable and consistent basis on which to assess the affordability of its equipment programme.
The Department remains stuck in a cycle of focusing on short-term financial pressures. For example, it has sought to balance its annual budget by again deferring or descoping the development of capabilities, resulting in poor long-term value for money, and the use of all its contingency funds in 2020–21 to help offset funding shortfalls, reducing its flexibility to respond to any in-year financial pressures. The Department’s assessment of the Plan’s affordability also assumes it will make significant levels of efficiency savings in the future. However, it has continued to include unrealistic savings in the Plan, including £3.7 billion of savings for which it has not yet implemented plans to deliver. The failure to achieve all of these savings—and find additional savings - will increase the financial pressures and make the Plan even more unaffordable.
In November 2020, the government announced in the Spending Review that it would provide an additional £16.5 billion of defence funding over the next four years. It intends that this funding will allow the Department to modernise and invest in new technologies, including its cyber and space capabilities. The Spending Review has given the Department an opportunity to address the funding shortfalls, even though the announcement of strategic defence priorities, to be set out in the Integrated Review of Security, Defence, Development and Foreign Policy (Integrated Review), has been delayed. However, as the existing equipment budget is not balanced, the Department must make tough choices to end the vicious circle of short-term financial management and delays in developing military capabilities. Once it has established a balanced equipment programme, the Department will need to develop a more sophisticated approach to assessing future funding pressures and managing its equipment expenditure. The Committee intends to scrutinise closely how the Department resets the Equipment Plan to ensure it can deliver future capabilities in a way that achieves value for money.