Thursday, October 6, 2011

Post SDSR - The SDSR Numbers

(Ministry of Deficits? Not quite an anagram, but there you are...)

Prof. Malcolm Chalmers of the Royal United Services Institute (RUSI, MoD's favourite thinktank) published a new paper this week on UK Defence spending, and it makes interesting reading. In this post, we'll look at what was said about the numbers and the Strategic Defence and Security Review (SDSR); in the next one, we'll look at implementation through Planning Round 2011 (PR11). 

Labour's Legacy
The first (and most important) point is that the the out-going Brown Administration left the MoD in a terrible positon. Depending on how you ask the question, the scale of the 10-year budget shortfall between 2010-11 and 2020-21 was either £27bn (a difficult £2.7bn p.a. - or roughly 8% of the MoD's baseline budget) if you allowed for 1.1% real growth, or a terrifying £51bn (an impossible £5.1bn p.a. or more than 14% of the annual budget) if the budget had been maintained at 2010-11 in real terms.  And these were estimates which assumed that this programmes in the budget would (for the first time) run on time and to budget. (Ah. Ish?)

(Bob Ainsworth MP, Labour's last Defence Secretary - "ineffective" might be the politest word.)

In fact, despite Labour's recent attacks on the Government over the cuts, for Labour to close this funding gap, spending would have had to increase at at least 2.2% per annum for the next decade. Ignoring austerity and the fiscal realities that go with this, this is a level of increase unknown since 1985, and more than twice the 1.1% growth that they actually invested over the course of their 13 years in power. As Chalmers notes, 

"... as a result, the MoD found it increasingly difficult to fit an ambitious forward programme within a much less ambitious – albeit still slowly growing – budget."

Indeed. Worse, Labour in general and Bob Ainsworth in particular made a number of pledges to purchase equipment late in the Brown Administration that sounded good - e.g. another 22 Chinook helicopters - when they must have known that there was no money to pay for them. This was either breathtakingly cynical politics of the worst kind, (with the results measured in the dead and maimed), or it demonstrated a criminally complete lack of knowledge, competence, control and responsibility. Either should have been a resigning - or sacking - matter.

So not only should Labour apologise for their past record, they should also probably shut up about the whole thing for a decent period, until they've actually got a grip on the big questions (e.g. UK's role in the world, Trident, funding this defence business).

May 2010 - A new dawn. (Or at least a Defence Review)

(We're on the same side. Honest.)

SDSR was the long overdue defence review that built on the hodgepodge of the period since the 1998 Strategic Defence Review (SDR 98) and 2002's New Chapter. And the £51bn hole in the budget over the next decade needed to be addressed at a time of an unprecedented fiscal squeeze. Enter Liam Fox, stage right.
But austerity isn't fun, as the current Government is finding out. Liam Fox successfully fought for a smaller cut than the Treasury wanted, but was only partially successful. Defence did do comparatively well - it had an 8.5% real terms cut by 2014-15 rather than the 10-15% that most external observers were expecting; at some level this is a comparative triumph. However, this was on top of the £51bn that MoD was already in hole over the next decde, and led to two problems.

First, due to the 8.5% cut that the MoD received in the austerity budget of the 2010 Comprehensive Spending Review, the 10-year deficit increased to an eye-watering £74bn.

Second, the Treasury (very sensibly, in my view) got the funding of Trident replacement back into the defence budget, rather than being a freebie provided by the Treasury. This added between £25bn and £50bn to the Departmental deficit through to 2030 - and as the majority of these costs come after 2020-21, they are not included in the £74bn figure. It can be inferred that HMT was trying to achieve two things - first, not to pay for it, and second to make Trident compete against other defence priorities. The first worked beautifully, but the second failed, as Liam Fox moved Trident into the untouchable box, significantly decreasing the flexibility of the overall budge - by at least £7bn over the years to 2020.

Clearly something had to give. Actually, quite a lot of somethings had to give; here's a flavour.

(Nimrod MRA4: all 11 scrapped to save £200m p.a. after spending £4bn. Would have been quite useful, too.)

(Type 22/3 frigate HMS CUMBERLAND - first UK ship to Libya, scrapped on return.* The other three 22/3s went too, taking the surface fleet to 19 FF/DD - compared to 35 in 1998, and 65 in 1982's Falklands War.)

(Harrier GR9 - more mourned by RN rather than RAF, as it ended UK carrier ops until 2022(ish). (Maybe).) 

(CVS HMS ARK ROYAL - scrapped, along with her jets.)

 (Sentinel R1 - brand new, now permanently deployed to Afghanistan, to be scrapped in 2015)

The eagle-eyed amongst you will note that there is not heavy on land forces - the Army and Royal Marines were largely left alone until after the withdrawal from Afghanistan that has been pencilled in for 2014. This will move the subsequent pain for them until the defence review after the 2015 election. And this ignore the 40,000 MoD civil servants and 22,000 servicemen and women who will lose their jobs in the next three years, along with a slew of new programmes.

(Truth is stranger than fiction...)

SDSR Process
So how did this happen? And why were such apparently random choices made, such that the RN will have one and a spare aircraft carrier, (with no aircraft - cunning, huh?), and the RAF has so many PFI-funding air refuelling tankers that they will have nearly two per fast-jet squadron? Some of the answer will be in the process.

It was long suspected, but Chalmers' paper is the first time that I've seen it (semi-officially) confirmed that the MoD was deeply engaged in Op OSTRICH, ignoring the HM Treasury's (HMT) request that all Departments study the impact of 10% and 20% cuts in their budgets. Until the last three weeks of the Review, MoD appears to have had a single case of 3% cut, and MoD

"believed – or at least hoped – that the Treasury was bluffing, and presented no detailed plan for how to make steeper reductions."**

Ah. Taking on HMT in a game of chicken is always a cunning plan. They will blink! Until they don't. Oh. The effect was predictable... Chalmers again:

"... [this] had the effect of increasing total ten-year required savings by £17 billion. This not only required much deeper savings in 2013/14 and 2014/15, a challenge which the MoD has still not fully been able to meet. As importantly, it reduced the baseline for spending levels for the rest of the decade."***

The MoD may cry foul and grumble about mixed political messages, but the reality is that probably didn't believe things could get this bad, and the culture in the MoD meant that the level of prioritisation that would've been required simply didn't exist, as the subsequent Levene Review into Defence management found. This set the stage for the final stages of the SDSR debacle.

(They have to agree as well, you know....) 
SDSR Endgame
Chalmers recounts the MoD's long term plan to meet the Treasury's numbers was intertwined with the repatriation of the Army units from Germany. This would've seen the Army reduced by 20,000 to 82,000 by 2020 primarily by withdrawing from Germany without replacing those numbers - the point being that building a significantly increased infrastructure for the returning Army units would have been prohibitively expensive, which is the primary reason that it hasn't happened since the end of the Cold War. An elegant administrative solution.

Except that Number 10 didn't buy it.

Essentially, No 10 wouldn't go for cuts in the Army whilst there was a war on in Afghanistan. In fact, there were some cuts - 7% of the Army's regular strength to 95,000 by 2015 - but the weight of the cuts went on the RN (14% personnel cuts) and the RAF (17%). It was also in this end game that Nimrod / LRMPA and Carrier Strike (HMS ARK ROYAL and the Harrier GR9s) were binned without replacement. There is reportage that this was all a last minute fix to save the Tornado GR4 strike aircraft instead of the Harrier GR9s achieved by an RAF end-run, but even if true, in operational terms it was probably the correct decision.

All that was left was for the senior leadership to trumpet the strategic nature of the SDSR. But the façade cracked under the internal contradictions - aircraft carrier minus aircraft, doing the same or more with less.  

The bigger problem was that all of this pain still didn't close the £74bn gap. This would be the job of PR11, of which more shortly.

*I'm told it is possible to take a phot of a ship without it wiggling about at high speed, but as I was repeatedly told, (as your author is a slow learner) "Tobbes, what's the point of that?"
** Chalmers, p. 7
*** Chalmers, p. 7

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