A New Direction for the Ministry of Defence's Budget? - Implications of the November Spending Review - RUSI
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MALCOLM CHALMERS 1
Royal United Services Institute
for Defence and Security Studies
POLICY BRIEF
A New Direction for the Ministry
of Defence’s Budget?
Implications of the November Spending Review
Malcolm Chalmers
JANUARY 2021POLICY BRIEF 2
O N 19 November 2020, Prime Minister Boris Johnson announced that
he was ‘increasing defence spending by £24.1 billion over the next four
years’, a commitment that was subsequently confirmed by Chancellor Rishi
Sunak in his Spending Review.1
But what does this mean for the Integrated Review, due to appear soon?
Defence Secretary Ben Wallace recently stated that ‘all of us have got used
to SDSRs that looked good at the press launch but faded by tea-time’.2 So
why might it be different this time round? Will the Ministry of Defence (MoD)
grasp the opportunity, at last, to move beyond the financial troubles that
have plagued it during successive Conservative-led administrations, ever
since the cost-cutting Strategic Defence and Security Review (SDSR) in 2010?
Given the wider pressures facing the public finances as a result of the
coronavirus crisis, most commentators were pleasantly surprised by the size
of the financial settlement.3
The Treasury’s agreement to guarantee MoD funding for four years was a
particularly significant, and hard won, victory for Defence Secretary Wallace.
It is not entirely clear what swung the debate between the MoD, Number
10 and the Treasury, concluded only days before Johnson’s 19 November
announcement. The importance of the ‘levelling up’ agenda (a central plank
of Johnson’s political platform in the 2019 general election) seems to have
played a role, with companies able to point to the important role of the
military shipbuilding and aerospace sectors in some of the more deprived
parts of the UK.4 A concern to start off on the right foot with US President-
elect Joe Biden, whose victory had become clear only days before, may
also have helped.
Confirmation of additional long-term funding for defence also coincided
with the prime minister’s agreement to cut the Official Development
Assistance budget from 0.7% of national income to 0.5% from 2021, with
any prospect for a longer-term reversal of the cut to be left until ‘the fiscal
situation allows’.5 Fiscal hawks in the Treasury could therefore be reassured
1. Boris Johnson, ‘PM Statement to the House on the Integrated Review’,
19 November 2020, , accessed 22 December 2020;
HM Treasury, Spending Review 2020, CP330 (London: The Stationery Office, 2020), p. 68.
2. Ben Wallace, ‘Defence Secretary’s Speech on Defence Reform’, speech given at
RUSI, 11 December 2020, , accessed 22 December 2020.
3. Helen Warrell, ‘Britain’s Military Still Faces Hard Choices Despite Spending
Boost’, Financial Times, 19 November 2020; Lucy Fisher, ‘Navy is Big Winner in
Johnson’s £16bn Spending Spree’, The Times, 20 November 2020.
4. For example, see Nathan Mathiot, ‘Integrated Review #5: Looking Toward the
Future’, ADS blog, 29 October 2020, , accessed 22 December 2020.
5. HM Treasury, Spending Review 2020, p. 70.MALCOLM CHALMERS 3
that, taken as a whole, the cross-government Integrated Review of Security,
Defence, Foreign Policy and Development would be financially neutral.
THE IMPORTANCE OF COMPOSITION
The allocations announced in the Spending Review, published on 25
November, confirmed that the MoD would receive some £24.1 billion extra
over the next four years, calculated as the sum of the extra amounts (in cash
terms) provided for each year over and above the amount provided for this
year (2020/21).6 The review also revealed two further details, not discussed
in the prime minister’s statement, that together make the defence element
of the forthcoming Integrated Review quite unlike any defence review since
the early 1950s.
First, the entire real-terms increase announced in the review – amounting
to some 9.2% over the five years from 2019/20, an average of some 1.8%
per annum – has gone into capital spending (or CDEL), which is due to
grow by 43% in real terms over this period. In contrast, spending on day-
to-day running expenses (RDEL) is set to fall in real terms over the same The forthcoming
period, by around 2%. Integrated Review
This is a marked break from the trend after the 2015 SDSR, which was is quite unlike any
finalised after then Chancellor George Osborne had agreed to a partial defence review
reversal of the cut in the defence budget during the earlier years of the
decade. As a consequence, and with some later one-off adjustments, total
since the early
spending grew by 6.4% in real terms between 2016/17 and 2019/20. This 1950s
amounted to an average growth rate of some 2.1% per annum, roughly
equivalent to the projected growth for the five years up to 2024/25. But the
composition of this growth was quite different from what is now planned,
with capital spending growing only slightly faster (11.5% in real terms) than
recurrent spending (4.8% in real terms – see Table 1).
The 2020 Spending Review, therefore, is much more generous than in the
past in its allocation for capital investment while, simultaneously, squeezing
recurrent spending more tightly than in recent years. According to Treasury
rules, the MoD will have no ability to reallocate spending from CDEL to plug
a funding gap in RDEL.7
6. Ibid., p. 68.
7. HM Treasury, Consolidated Budgeting Guidance: 2020-21, PU2956 (London:
The Stationery Office, 2020), p. 13.POLICY BRIEF 4
Figure 1: Average Annual Growth of Real-Terms Running Costs and Capital Costs,
2016–20 and 2019–25
8
Key:
7 Resource costs
Capital costs
Change (% per annum) 6 Total
5
4
3
2
1
0
-1
Not since Korean 2016/17–2019/20 2019/20–2024/25
War rearmament Source: See Tables 1 and 2.
has there been a
Second, this concentration of all additional resources on the capital budget
comparable increase has been accompanied by a remarkable front-loading of the spending
in UK defence increase. In 2021/22, the MoD’s total spending allocation increases by
10.8% over 2019/20 levels, and by a further 1.7% in 2022/23, before falling
investment spending by 1.5% and 1.6% (in real terms) in the next two years respectively (see
over such a short Table 2). Capital spending rises from an estimated £10.3 billion in 2019/20
period of time and £10.5 billion in 2020/21 to £14.4 billion in 2021/22 and £15.6 billion
in 2022/23: a cash increase of some 49% over only two years.8 Not since
Korean War rearmament has there been a comparable increase in UK
defence investment spending over such a short period of time.
Figure 2: Growth Each Year in Cash Capital Spending
18
16
Capital spending (£bn)
14
12
10
//
2019/20 2020/21 2021/22 2022/23 2023/24 2024/25
Source: See Table 1.
8. HM Treasury, Spending Review 2020, p. 67.MALCOLM CHALMERS 5
A significant part of the spending increase will go on closing the large funding
gap in the MoD’s procurement plan for defence equipment, which has been
the subject of much criticism from the National Audit Office in recent years.9
Further spending increases are likely to come from moving payments from
an overcrowded 2020/21 programme into next year. In addition, part of
the spending increase will go to modernising the defence estate, which it is
hoped can unlock future savings in running costs.10
Even so, there will be some scepticism among informed observers as to
whether the MoD and its suppliers will have the capacity – administrative
and industrial – to gear up spending levels as rapidly as currently assumed,
while preventing wasteful escalation in military specifications and contractor
costs. The challenges of delivering a £4-billion increase in capital spending
in one year, starting just three months from now, will be further increased if
coronavirus-related restrictions continue through to summer 2021.
Yet it should not be a criticism of the MoD if it falls somewhat short of
its projected capital spend for 2021/22. The quality and sustainability of
procurement should be a higher priority.
It should not be
The MoD now has a once-in-a-generation opportunity to raise its annual a criticism of the
capital budget permanently to the higher level that has been agreed through
to 2024/25 and ensure that this level becomes the baseline for subsequent MoD if it falls
years. If it is to retain political support for this increase beyond 2024, somewhat short of
however, it will need to show that it has managed it wisely. If the MoD finds
itself returning to the Treasury in 2022 pleading for more resources – as it did
its projected capital
scarcely two years after the 2015 SDSR – it is unlikely to gain a sympathetic spend for 2021/22
hearing. If contractors take undue advantage of the additional cash injection
to increase prices, or if MoD customers succumb to the temptations of
specification escalation, then the sceptics will have been proven right.
Whether history repeats itself in this way will depend, most of all, on the
decisions now being taken on the defence element of the Integrated Review,
due to be published alongside that review in early 2021.
The MoD at its highest levels, led by both the defence secretary and the Chief
of the Defence Staff, has been clear on the need to retire ‘sunset capabilities’
in order to invest in the technological transformation which, they argue, the
armed forces need in order to be competitive into the 2030s.11 This is likely
9. National Audit Office, Ministry of Defence: The Equipment Plan 2019 to 2029,
HC 111 (London: National Audit Office, 2020), p. 5.
10. Richard Knighton, evidence provided to the House of Commons Defence
Committee, ‘Oral Evidence: MoD Annual Report and Accounts 2019-20’,
HC 1051, 8 December 2020, Q. 21.
11. Nick Carter, ‘Chief of the Defence Staff, General Sir Nick Carter launches the
Integrated Operating Concept’, speech given at Policy Exchange, London,
30 September 2020, , accessed 22 December 2020.POLICY BRIEF 6
to require hard choices on all the main elements of the MoD’s recurrent
budget: spending on personnel (half of the total); spending on equipment
support; and spending on inventory and infrastructure maintenance.12
The chancellor’s decision to pause pay increases for most public sector
employees next year will help in this regard, but further pay restraint,
alongside reductions in payroll numbers (military and civilian), is on the
cards.13 The prospect of a more active global force posture – most visibly
through the deployment of carrier task forces, but across the services – will
add further cost pressures.
THE RIGHT BALANCE?
The MoD has a strong case for prioritising capital spending in its part of the
Integrated Review. By doing so, it implicitly recognises the need to ensure that
the armed forces prepare themselves for what is likely to be an increasingly
competitive threat environment in the 2030s, and beyond, even if some risks
have to be taken in retiring some older current capabilities to do so.
Military capability
The MoD would also be right to argue that, over time, it makes sense to assume
is becoming more that military capability is becoming more automated, with progressively fewer
automated, with people (especially on the frontline) needed to deliver any given effect. Far
from being a revolutionary statement, this reflects a longstanding trend in
progressively fewer most technologically advanced militaries (ally and adversary alike).14 The
people needed to wave of new technologies now being developed will, if anything, accelerate
this trend. This does not, in any way, negate the central role that highly skilled
deliver any given
and adaptive personnel have at the heart of national defence and security
effect capabilities. But they will need to have different skills, and be organised in
different ways, if they are not to be outsmarted by future foes.
Yet not all investment in new equipment delivers commensurate increases in
capability. All too often, military requirements are driven by the institutional
imperative to replace ageing kit on a one-for-one basis (or as near to this as
can be afforded). Additional resources can, all too easily, be eaten up by more
‘exquisite’ equipment specifications rather than accelerating the reform and
innovation which is needed.
12. Charlie Pate, evidence provided to the House of Commons Defence Committee,
‘Oral Evidence: MoD Annual Report and Accounts 2019-20’, HC 1051,
8 December 2020, Q. 6.
13. HM Treasury, Spending Review 2020, pp. 20–21.
14. Between 2000 and 2019, UK active service personnel numbers fell by 30%,
while those for France and Germany fell by 31% and 19% respectively. Personnel
numbers for China and Russia fell over the same period, by 28% and 41%
respectively. In contrast, US and Japanese service personnel numbers have
remained constant over the past two decades. See International Institute for
Strategic Studies, The Military Balance 2001-2002 (Oxford: Oxford University
Press, 2001); International Institute for Strategic Studies, The Military Balance
2019 (Abingdon: Routledge, 2019).MALCOLM CHALMERS 7 CONCLUSION Taking full advantage of the government’s decision to award the MoD a multi-year spending settlement will not be easy. The government has chosen to devote the additional £24 billion for defence almost entirely to increasing defence investment, while simultaneously reducing real-terms running costs. It will therefore have to make difficult decisions on where to reduce day-to-day spending: a process made politically harder by the perception that the Spending Review now allows the MoD to embark on a ‘spending spree’. Until the full results of the Integrated Review are known, it remains unclear whether the MoD will be allowed to make these decisions. If not, it is still possible that the curse of budgetary overcommitment, which has overshadowed UK defence planning for the last decade and more, will remain alive and well. Malcolm Chalmers is Deputy Director-General of RUSI and directs its portfolio of research on contemporary defence and security issues. His own work is focused on UK defence, foreign and security policy.
POLICY BRIEF 8
ANNEX
Table 1: Recent Real Terms Trends in Defence Spending, 2016/17–2019/20
2016/17 (£m) 2019/20 (£m) Change (£m) Change (%) Change (%
per annum)
Resource 28,163 29,501 + 1,338 + 4.8 + 1.6
Capital 9,202 10,261 + 1,039 + 11.5 + 3.7
Total 37,365 39,762 + 2,397 + 6.4 + 2.1
Note: All figures refer to outturn spending covered by the Departmental Expenditure Limit
(DEL) and exclude Annually Managed Expenditure (AME). Figures for Resource DEL exclude
depreciation. Cash figures have been adjusted to 2019/20 price levels using the GDP deflator.
Source: HM Treasury, Public Expenditure Statistical Analyses 2020, CP 276 (London:
The Stationery Office, 2020), Tables 1.6, 1.9 and 1.11.
Table 2: Future Real Terms Trends in Defence Budgets, 2019/20–2024/25
2019/20 2021/22 2022/23 2023/24 2024/25 Change, Change Change
(£bn) (£bn) (£bn) (£bn) (£bn) 2019/20 (%) (average
to % per
2024/25 annum)
Resource 29.7 30.3 30.2 29.4 29.0 - £0.7 bn - 2.3 - 0.5
Capital 10.3 13.9 14.9 15.0 14.7 + £4.4 bn + 42.6 + 7.4
Total 40.0 44.3 45.1 44.4 43.7 + £3.7 bn + 9.2 + 1.8
Note: All figures refer to spending covered by the Departmental Expenditure Limit (DEL)
and exclude Annually Managed Expenditure (AME). Figures for Resource DEL exclude
depreciation. All figures refer to estimates before departmental transfers and are not
directly comparable to the outturn figures used in Table 1. These figures exclude possible
additional spending if the MoD accesses the Dreadnought contingency fund, which is
provisioned for up to £1.3 billion for 2021/22 to 2024/25 in the HM Treasury Reserve.
Real-terms figures for 2020/21 have not been included because of the distortions caused
by the large increase in assumed GDP deflator growth in this year. For discussion of the
methodological issues involved, see Chris Giles, ‘UK’s Poor GDP Performance Rooted in
Weak Household Spending’, Financial Times, 16 November 2020.
Sources: HM Treasury, Spending Review 2020, CP330 (London: The Stationery Office,
2020), p. 67 for cash figures. These have been adjusted to 2019/20 price levels using the
GDP deflator figures used for Spending Review 2020. HM Treasury, ‘GDP Deflators at
Market Prices and Money GDP November 2020 (Spending Review)’, 26 November 2020,
, accessed 22 December 2020.About RUSI
The Royal United Services Institute (RUSI) is the world’s oldest and the UK’s leading defence and security
think tank. Its mission is to inform, influence and enhance public debate on a safer and more stable world.
RUSI is a research-led institute, producing independent, practical and innovative analysis to address today’s
complex challenges.
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from research, publications and conferences, RUSI has sustained its political independence for 190 years.
The views expressed in this publication are those of the author, and do not necessarily reflect the views
of RUSI or any other institution.
Published in 2021 by the Royal United Services Institute for Defence and Security Studies. RUSI is a
registered charity (No. 210639).
This work is licensed under a Creative Commons Attribution – Non-Commercial – No-Derivatives 4.0
International Licence. For more information, see .
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