The claim
“This Government has inherited a £38 billion black hole in the future defence plans, bigger than the entire annual defence budget of £33 billion.”
David Cameron, presenting the Strategic Defence and Security Review, 19 October, 2010

The background
Ahead of today’s defence review, the Coalition Government has consistently claimed that it inherited unfunded commitments from the Labour Government that it can’t honour in these straitened times.

Many of these commitments relate to equipment orders – for kit including aircraft carriers and fast jets – in which spending is spread over several years.

The analysis
The public spending watchdog, the National Audit Office, publishes a major projects report every year.

Its 2009 report said the defence programme was “unaffordable” and “the financial crisis means a substantial increase in funding is unlikely”.

It said the Ministry of Defence had attempted to cut short-term costs by slowing down projects, which had actually added to the long-term bills.

One example was the Queen Elizabeth Class aircraft carriers. A decision to slow down this project, by spreading the cost over future years, was forecast to save £450m over four years, but would add another £1.1bn to the final bill.

The head of the NAO, Amyas Morse, used the same language as Dr Fox to describe the situation.

“The Ministry of Defence has a multi-billion pound budgetary black hole which it is trying to fix with a ‘save now, pay later’ approach.”

The report went on to explain how big this “black hole” was.

“The Ministry of Defence has already reduced the deficit between the defence budget and planned expenditure by £15 billion, but a shortfall of between £6 billion and £36 billion remains.”

So how did the NAO reach this figure?

“If the Defence budget remained constant in real terms, and using the Department’s forecast for defence inflation of 2.7 per cent, the gap would now be £6 billion over the ten years.

“If, as is possible given the general economic position, there was no increase in the defence budget in cash terms over the same ten year period, the gap would rise to £36 billion.”

So £36bn rests on a particular scenario – that there will be no cash increase in the defence budget over the next decade. How likely is that?

Defence economist Professor Ron Smith, from Birkbeck in London, believes it is more likely that the budget will remain flat in real terms, once inflation has been added. He estimates that would mean unfunded commitments lying between £6bn and £36bn.

An MoD spokeswoman told Channel 4 News that the NAO’s figures were purely concerned with equipment, while the £38bn used by the Prime Minister and Defence Secretary Liam Fox related to the defence programme as a whole, including personnel costs.

She said his estimate assumed the cost of new equipment and maintaining that equipment would make up £20bn of the £38bn, but added that the MoD was not prepared to give a detailed breakdown explaining exactly how the £38bn figure had been reached.

The verdict
It is undeniable that decisions taken by the previous government have added to the pressures on the defence budget.

Opting for delays in equipment orders saves money in the short term, but is more expensive in the long run.

But the £38bn claim cannot be verified because the MoD can only account for £20bn of this and will not explain in detail how the other £18bn has been worked out.