City MP raises concerns over defence capability and affordability

The Public Accounts Committee today questioned senior figures from the Ministry of Defence as the UK faces shrinking defence budgets and an increasing threat from Russia.

Stephen Morgan MP, member of the Public Accounts Committee, jointly led questioning senior civil servants and military leadership on the financial sustainability of the defence equipment plan after the National Audit Office (NAO) published a report which found the potential affordability gap for the department could be £20.8 billion.

The NAO report found that the Department has not included £9.6 billion of forecast costs in the Plan. This variance arose as a result of the Department’s 2017 budget setting process not being able to match costs to available budgets. In addition, the NAO’s review found that the Department has understated forecast costs by at least a further £1.3 billion as the planned cost of buying five Type 31e frigates are not included in the Plan, while the cost of nuclear-related projects continues to grow.

There are also significant risks to the cost of the Equipment Plan: over-optimism in forecast costs of £3.2 billion as calculated by the Department’s independent Cost Assurance and Analysis Service; and the risk of increased costs of £4.6 billion due to the Department not using foreign currency exchange rates that reflect market rates at the date of the Plan.

Stephen Morgan MP, said:

‘It was useful to question witnesses about this topic, so vital to our national security.

There is real fear amongst many here in Westminster about the financial plausibility of the MoD’s equipment plans. Of course, these are being felt especially acutely following the recent escalation in aggression from Russia.

It is crucial the Government properly forecast and fund the costs of modernising and maintaining the capability of our armed forces, now more than ever.’

Amyas Morse, head of the National Audit Office, commented:

‘The Department’s Equipment Plan is not affordable.

At present the affordability gap ranges from a minimum of £4.9bn to £20.8bn if financial risks materialise and ambitious savings are not achieved.’

The PAC raised NAO concerns that the Ministry of Defence’s ten-year Equipment Plan does not provide a realistic forecast of the costs the Department will have to meet over the next 10 years buying and supporting the equipment it has determined the Armed Forces need.

Spending on equipment and associated support in the 2017 Plan is projected to be £179.7 billion, including a £6 billion contingency. But even after assuming the contingency will be used, the NAO has calculated a minimum affordability gap of £4.9 billion. There is an additional potential affordability gap of £15.9 billion if all risks of cost growth materialise and the Department does not achieve any of the savings assumed in the Plan. Overall, the potential affordability gap could be £20.8 billion.