Miscalculations while budgeting the Ministry of Defence’s (MoD) plan to buy new military equipment has left a multi-billion pound “black hole”, the UK’s public spending watchdog has said.
In its review of the MoD’s Equipment Plan for 2017-18, the National Audit Office (NAO) said the £180bn 10-year plan to modernise the military was “unaffordable” and did not represent a “realistic forecast” of costs.
The NAO audits the affordability of the MoD’s rolling 10-year plan annually. Spending on equipment and support accounts for roughly 40% of the MoD’s overall budget.
The NAO’s report said that when calculating expected expenses, the MoD did not factor in £1.3bn in costs relating to a new fleet of frigates – a programme launched last year to introduce greater competition into the procurement of naval vessels.
It also highlighted the MoD’s failure to take into account £4.6bn in extra costs related to currency fluctuations between sterling and the dollar.
It said the MoD did not include £9.6bn in forecast costs for equipment and a £1bn increase in the cost of replacing Trident submarines and attack boats.
The report added the MoD did not provide clear evidence for its claimed £7.9bn cost savings and that it also failed to adequately outline how it intended to save the rest of its targeted £16bn by 2027.
It said all these failures could lead to a "black hole" of almost £21bn.
“The Ministry of Defence is facing a minimum affordability gap of £4.9bn. There is an additional affordability gap of £15.9bn if all identified financial risks of cost growth materialise and the department does not achieve any of the savings assumed in the [equipment] plan,” it said.
“Overall, the potential affordability gap is £20.8bn.”
It warned that the MoD needed to take urgent action to deal with the shortfall or delay its purchase of equipment.
“Unless the department takes urgent action to close the gap in affordability, it will find that spending on equipment can only be made affordable by reducing the scope of projects, delaying them or cancelling them altogether,” it said.
The report comes a week after recently appointed defence secretary Gavin Williamson announced the MoD will conduct a requirements review, called the Defence Modernisation Programme, which is expected to be released in the late summer.
Meg Hillier, chair of the Public Accounts Committee, said the MoD “simply doesn’t have enough money to buy all the equipment it says it needs”.
“Until the MoD comes up with a realistic plan for funding new equipment, the MoD is bound to end up scrapping or delaying projects haphazardly,” she said.
“This is not a sensible way of looking after our national defence.”
However, a MoD spokesman told the Financial Times that the NAO’s “worst-case scenario” was based on unrealistic assumptions.
“The report’s potential affordability gap of £20.8bn reflects the wholly unlikely and unrealistic situation where all equipment plan financial risks materialise and the MoD achieves none of its efficiency and savings measures,” it said.
“We have already saved almost £5bn in efficiencies while making sure our military have the best equipment available and taxpayers get value for money.”