National Security Strategy and Strategic Defence and Security Review 2015

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24 National Security Strategy and Strategic Defence and Security Review 2015 Budget for defence 65. The NSS & SDSR 2015 was underpinned by the Government’s commitment to meet the NATO target of spending at least 2% of GDP on defence “for the rest of the decade”. 113 On the basis of economic forecasts made by the Office for Budget Responsibility (OBR) in November 2015, this amounted to a real-terms increase in the MOD budget of 0.5% each year up to and including 2020–21, rising from a baseline budget of some £34.3 billion in 2015–16 to almost £38.1 billion by 2019–20. 114 Furthermore, the November 2015 Spending Review allocated the MOD approximately 60% of the new Joint Security Fund, which equated to an approximate increase of £2 billion over five years. 115 Under the NSS & SDSR 2015 and November 2015 Spending Review, therefore, MOD core spending is set to increase by 3.1% in real terms over the four years from 2015–16 to 2019–20, which contrasts with the real-terms reduction in spending of 8.5% between 2010–11 and 2015–16. 116 66. However, a recent Defence Committee Report concluded that the Government’s commitment to NATO’s 2% target does not mean that defence will be adequately resourced. 117 We share this conclusion. The budget settlement for defence relies on the UK’s GDP growing at the rate forecast by the OBR in November 2015. However, in March 2016 the OBR admitted that that forecast appeared to be optimistic. 118 The UK’s vote to leave the EU in June 2016 may well affect the growth of the UK economy in the foreseeable future. In the weeks preceding the referendum, major international organisations such as the International Monetary Fund and Organisation for Economic Co-operation and Development warned that the UK economy would stagnate, if not fall into recession, following a vote to leave the EU. 119 A May 2016 report by the UK-based Institute for Fiscal Studies (IFS) highlighted analysis that UK GDP might be reduced by between 2.1% and 3.5% in 2019 as a result of Brexit. The IFS continued: “A hit to GDP of this magnitude would imply a hit to the public finances, after taking account of the reduced EU contribution, of between £20 billion and £40 billion in 2019–20.” 120 In that context, even if the new Government were again to commit to spending at least 2% of GDP on defence, a stagnant or contracting UK economy might mean that the defence budget would be reduced in real terms. This would impact on the ambition and capabilities set out in the NSS & SDSR 2015. 113 HM Treasury, Summer Budget 2015, HC 264, July 2015, p 2 114 “Spending matters: defence and security budgets after the 2015 Spending Review”, RUSI Briefing Paper, May 2016, pp 1, 4 115 HM Treasury, Spending Review and Autumn Statement 2015, Cm 9162, p 25, Table 1.7; “Spending matters: defence and security budgets after the 2015 Spending Review”, RUSI Briefing Paper, May 2016, p 4 116 “Spending matters: defence and security budgets after the 2015 Spending Review”, RUSI Briefing Paper, May 2016, p 4 117 Defence Committee, Second Report of Session 2015–16, Shifting the Goalposts? Defence expenditure and the 2% pledge, HC 494, April 2016, para 11 118 Office for Budget Responsibility, “Economic and fiscal outlook—March 2016: Executive summary”, March 2016 119 “IMF says Brexit ‘pretty bad to very, very bad’”, BBC News, 13 May 2016; “The economic consequences of Brexit: A taxing decision”, OECD Economic Policy Paper No 16, April 2016 120 Institute for Fiscal Studies, “Brexit could add two years of austerity”, 25 May 2016, accessed 28 June 2016
National Security Strategy and Strategic Defence and Security Review 2015 25 67. The NATO minimum requirement for defence spending would not have been fulfilled in 2015 had UK accounting practices not been modified, albeit in ways permitted by NATO guidelines. 121 For example, the MOD included more than £1 billion in war pensions and MOD civilian pensions within the 2015 return to NATO. 122 68. We welcome the Government’s commitment to meet the NATO target of spending at least 2% of GDP on defence. However, we are concerned that the changed economic climate following the UK’s vote to leave the EU will see the defence budget reduced in real terms, reversing the November 2015 decision to make additional funding available for defence. We are also concerned that the NATO minimum spending target would not have been fulfilled in 2015 if UK accounting practices had not been modified, albeit in ways permitted by NATO guidelines. 69. Delivery of the NSS & SDSR 2015 is reliant on the reinvestment of efficiency savings of £9.2 billion, which are planned for the next five years. The MOD’s access to the Joint Security Fund reportedly depends on that target being met. 123 Approximately £2 billion of those savings will be made through the deletion of lower-priority items from forward plans, while efficiencies have been identified by Front Line Commands and through the planned 30% reduction in the MOD’s civilian headcount. 124 When we asked Oliver Letwin about the risk of relying on the reinvestment of such substantial efficiency savings, he replied that there is no ‘Plan B’. 125 He added: The figures quoted in paragraph 4.61 [of the NSS & SDSR 2015] are totally consistent with the implementation of the review, precisely because we designed it in that way as we were working through it. 126 70. The MOD will need to meet increased staff costs due to the ending of contractingout from employers’ National Insurance contributions, which took effect from 1 April 2016, and the additional employers’ superannuation contributions announced in the March 2016 Budget. Taken together, those initiatives will add more than 1% to the MOD’s 2019–20 budget, which will offset the planned increase in the defence budget set out in the November 2015 Spending Review. 127 71. The MOD may struggle to make the efficiency savings of £9.2 billion expected of it over the next five years. This ambitious target presents a significant risk to the delivery of the defence capabilities set out in the NSS & SDSR 2015. We are concerned that the planned increases in the MOD’s budget, as set out in the November 2015 Spending Review, will be offset by increased public sector employee costs. 121 Defence Committee, Second Report of Session 2015–16, Shifting the Goalposts? Defence expenditure and the 2% pledge, HC 494, April 2016, para 11 122 Defence Committee, Second Report of Session 2015–16, Shifting the Goalposts? Defence expenditure and the 2% pledge, HC 494, April 2016, para 28 123 “Spending matters: defence and security budgets after the 2015 Spending Review”, RUSI Briefing Paper, May 2016, p 5 124 “Spending matters: defence and security budgets after the 2015 Spending Review”, RUSI Briefing Paper, May 2016, p 7 125 Q78 126 Q79 127 “Spending matters: defence and security budgets after the 2015 Spending Review”, RUSI Briefing Paper, May 2016, p 6
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