As we approach the regular inter service squabble, covert media briefings and letters to the editor of the Telegraph that is commonly called the Strategic Defence and Security Review there are a number of challenges that sit firmly on the road to the future land of milk and increased defence budget honey.
1. The Lack of Cash and Increasing Costs Pincer
Look beyond the politics and it is clear that the economy is still in the toilet with unsustainable levels of debt that cannot be simply inflated away.
At some point, the UK (and West for that matter) is going to have to face facts about loading debt onto future generations, the costs of an ageing population and cut back on public spending.
Defence is public spending.
Defence inflation is higher than wider inflation and we seem unable to constrain cost growth across a wide range of major equipments (see the light fitting on FRES as an example)
There are good reasons of course but that does not alter the fundamental, each subsequent generation of tank, plane or ship generally costing more than what went before, in comparative terms.
If equipment costs more, people definitely cost more. Rising life expectancy, increasing medical costs and the need to care for what is likely, an increasingly demanding ex service personnel community (rightly so), means people costs will increase disproportionately.
The traditional approach of capabilities compensating for mass is going to have less utility in the future as many trades and groups have already started to lose critical mass. The scope for increasing contractorisation, outsourcing and and loading military tasks onto civilian organisations is diminishing, most opportunities to rationalise the military workforce have already been taken.
In short, the wider economy is less able to provide money for defence and what is provided will buy less ‘stuff’ and fewer people.
2. Mission Accomplished – The Shortage of Bad Guys
The Cold War is well and truly over, the UK faces no direct military threat and after 13 years of continuous military operations overseas the UK is not perceived as any safer or under greater threat, one way or the other.
Hold the outrage for a second, this is not a commentary on Iraq and Afghanistan but a recognition that the nation has carried on pretty well as normal for the last couple of decades, no threat of Russians driving across Europe beyond its immediate sphere of influence and the threat of terrorism is something by and large, seen on the news. Yes of course we had the 7/7 bombings, Lee Rigby and the residual terrorist activity in Northern Ireland but if you live in Manchester or Newcastle or Cardiff, terrorism is something that generally happens on your 40″ LCD Smart TV.
Did someone not say a few days ago ‘mission accomplished’?
The readers of Think Defence know about the coming hot war between the Shia and Sunni sects of Islam, we all know about the impacts on security of climate change, water shortages, religious intolerance, population movements, energy insecurity, a belligerent Russia, expansionist China and a gazillion other things in Africa, the Middle East, Asia and the Antarctic but Think Defence readers are not the norm.
In short, increasing defence spending after ‘Mission Accomplished’, good luck with that.
3. Politics, Competing Priorities and a Strategic Vacuum
Whether it be for health, education, climate change mitigation, energy security, policing, overseas aid or welfare, the simple fact is defence spending is not a high priority for the general population and if politicians want to gain office, it will not be off the back of a ‘spend more money on defence’ ticket.
If a coalition or left wing government comes into power in 2015 then simple politics dictates a lessening of the demand for sustaining or increasing defence spending.
No amount of complaining about NATO minimums is going to trump back room policy deals and trade-off’s
Then of course there is service politics which conspires to reduce the value for money the UK obtains from its not inconsiderable defence budget.
Genuine strategic thinking seems to elude modern politicians and decision makers, in this vacuum, making the case for increasing defence spending whilst flood defences are crumbling or old ladies in bobble hats are freezing to death because they can’t afford to put the gas fire on is likely to remain incredibly difficult, see item 2.
Finally, Scotland.
4. Risk Aversion
The UK is becoming increasingly risk averse and this has been institutionalised in defence terms by successive governments.
If the deployment of military force becomes so fraught with ‘what might happen if’ questions and resultant paralysis in decision making the less they will be seen as an answer and this will be manifest in SDSR 2015.
See item 3
5. Resistance to Change
Despite increasing jointery the three services are still as fundamentally resistant to change and deep reform as ever.
Pressure from the defence industry, a lack of clear strategic thinking and old fashioned organisational inertia means radical reform that maximises outputs at the expense of tradition and ‘service first’ will remain stuck in limbo, other than that, the norm of making yesterday perfect will continue to influence defence decision making.
Whole herds of sacred cows will remain free to roam our green and pleasant land.
So what does all this mean?
SDSR 2015 will…
- Reduce the overall defence capability and influence of the United Kingdom
- Present itself as strategic thinking wrapped up in ‘tough decisions’ that honour ‘our brave servicemen’ whilst maintaining the outward appearance of normality because of ‘efficiency savings’ and ‘agility’ mean we can do the same with less
- Provide for a few shiny baubles to keep the grown ups and the defence industry happy
- Still consume billions of pounds yet waste many of them
Anyone that wishes for a new age of significantly increased defence spending in relation to actual increasing security threats should watch this video about wishes
httpv://www.youtube.com/watch?v=E_bx6B3dBMM
SDSR 2015 is an opportunity for real strategic thinking about how defence and security in a budget constrained world can be delivered.
Instead it will be a ‘steady as she goes’ effort to preserve the current status quo.
My wish is that it produces fresh and innovative thinking which results in a set of defence reforms and a subsequent capability set that addresses modern threats to the UK and a range of benefits outside those threats in an environment of constrained spending, where innovation maximises every last penny.
Ah, now what was I saying about wishes!
martin,
A few corrections. Inflation will still be caused even if there is not a scarcity of resources. Excess money supply devalues money and that causes inflation, you are thinking of inflation driven by rising costs. They are two different but related things.
Chinese manufacturing has actually acted as an inflationary force in recent years as Chinese workers begin to make wage demands that feed back into the cost of your ipad. The recent fall in inflation has been associated with falling commodity prices, tax rises running out and interesting methodology.
There is no such thing as “a dangerously low level of government bonds” that is a complete myth, without them investors will just find other assets to invest in.
Money printing is a funny thing, currencies rely on confidence which is a human emotion, £300 billion may not break it but £450 billion might. Finally, if you followed my earlier link QE did drive inflation, that was actually the point.
…which are the remaining dispensable bits of defence spending that we can live without?
CASD and the British Army.
You naughty man.
I would like to see some evidence for the Tories hating the carriers more than any other party, their actions in 2010 were were consistent with their aims of reducing defence spending. It was really the RAF that took the brunt of those cuts.
Unless something severe happens the carriers are probably safe anyway, they seem to fit quite nicely into the post 2010 model of RN flat top operations- essentially large LHAs. Two of them will allow for one operational and one in refit/extended readiness as has been the case since 2010 (and will be until Illustrious’ decommissioning next year) so that one is probably wrapped up. Outstanding issues are probably as follows:
RN: River class fate, T26 numbers confirmation, carrier confirmation
RAF: Sentinel and Shadow retention and Scavenger de-scoping. Also, total F-35 buy and long-term (2030+) Typhoon/Reaper replacement (do not expect any expansion beyond the 7 squadron force). We might also see some effort to reduce the helicopter force now the Army is shrinking, post 2015 do we really need all those Chinook’s and Pumas? It seems certain that the RAF Merlin’s will be upgraded and used to replace the Sea King Commando fleet for a start
Army: Many questions, likely to be the most vulnerable target with many programmes still not begun or heavily delayed and recruitment stalling- this could be messy with Afghan over
“I do agree that the Tory’s hate the carriers though. Not sure why no votes for them in scotland I suspect? ”
Some Tories (though not I suspect Messrs Fox or Hammond) “hate” the carriers because their constituencies include a significant Army footprint, many of whom have fully bought into the “Our Boys lacked body armour, protected vehicles and helicopters in Iraq and Afghanistan because Gordon Brown wanted to protect shipbuilding jobs in his constituency and spent the money on two carriers” conspiracy theory. Others (like Osbourne and CMD) probably see the long-running re-hash of bad news stories as a stick with which to beat Labour.
hi everyone long time lurker here this my first post so please be gentle
looking at sdsr15 agree with @martin re RN and RAF at barebones manpower and units wise for many reasons stated above
heres a thought though how about freein monies up to expand 16aab back to full strength and reestablish 24 cdo eng reg by funding public duties regiments in london and edinburgh from duchy of lancaster revenues as the monarchy is now funded(15%) with profits increasing from offshore wind turbine liscences/rent and increasing profits from property on mainland would this funding – aprox 2 guards reg 4 incremental coys, HCR , HAC etc enable this to happen ?
i understand the fisheries prot squadron is funded by another govt dept this way? Aswell as search and rescue ?
similarly red arrows for raf, various aac and para display for army
also why have so many adaptable brigades surely 42brig should merge with 4th infantry for north of eng and 160 (wales) and 38 (ni) merge to form rifles brigade covering wales and NI thus cuttin overheads and top brass? Gives 3 deployable and 2 infantry brigades supporting in adaptable div?
sorry if sounds off the wall just an interested observer of TD and uk armed forces
Sorry for all the spelling mistakes in my post bloody IPAD auto correct.
@ a
If we take away the carriers then we need to remove the amphibs and 3 commando because the carriers will be providing the helicopters.
Without the amphibs and the carriers I would question the need for any navy at all.
If we want to keep the amphibs then we would have to build a new LHd andI would question the wisdoms spending more money when we have already paid for 2 large ones.
I do agree that the Tory’s hate the carriers though. Not sure why no votes for them in scotland I suspect? maybe of the carriers where built in surrey it might be different.
a,
But that is the point, the UK is not maintaining a constant debt to GDP ratio, the debt to GDP ratio is currently forecast to keep rising through to 2015 and that cut-off is on the assumption of further cuts, beyond that date rising interest rates will progressively increase the cost of servicing that debt as it is rolled over thus placing further pressure on government spending. Which nicely brings us back on topic.
As for parts of the Armed Forces that are vulnerable, the Army is most obvious, with recruiting going badly and large numbers of outstanding procurement/upgrade programmes it looks especially vulnerable. Particularly taking into account the savaging the RAF took in 2010 and the Navy prior to that.
By the way, Leftists aren’t especially fond of aircraft carriers either, it was Labour governments that cancelled the Malta and CVA-01 classes and that decommissioned Victorious, Eagle (whilst announcing the complete run-down of the carrier fleet) and later Invincible. It was a conservative government that saved Ark Royal the older from the same fate in 1970.
On the economics front its worth noting that printing money will only produce inflation if their is a scarcity of resources in the economy.
Deflationary pressure is already seeping in from the vast amount China has poured into manufacturing capacity over the past five years and the fall in commodity prices.
Much of the QE money has been absorbed into bank balance sheets so it has not and possibly never will reach the real economy.
Currently the UK government effectively owns around 1/3rd of its own debt and has already written off the interest payments. If the government can print £300 billion and not produce a high degree of inflation then why should it not do this. Its all our money at the end if the day. if the government does not over the long term sustain a deficit close to inflation then eventually it will reduce the amount of government bonds to a dangerously low level. This almost happened in the early 2000 under Brown. we must remember than UK GILTS are a vital commodity for banks and pension funds in particular and with out them the financial system can grind to a halt.
Also we should not forget that we know how to deal with high inflation. we have been doing it for a long time. Noon one yet knows how to come out of a deflationary spiral. The Japanese are trying but still have a long and dangerous road to go. The US and UK will likely be much better off in the long term for all their money printing. Europe’s probably already f**ked and it’s only going to get worse for them.
Over the long term, a state simply cannot spend more than it’s earning.
Why not? As long as the debt-to-GDP ratio stays constant, everything should be OK – and if your economy is growing, then in order to keep that constant you will _have_ to spend more than you take in.
The UK has been spending more than it earns pretty much for as long as the UK has existed. (That’s why there’s a national debt at all!) And yet, somehow, it survives.
But this is all a bit irrelevant for defence. The point is not whether the debt or the deficit are a TERRIBLE CRISIS. The point is that the government is full of people who think it is, and will act accordingly by introducing massive spending cuts.
…which are the remaining dispensable bits of defence spending that we can live without?
The carriers, I suspect, would be high on the list. For whatever reason, Conservatives don’t like aircraft carriers – they hate having to build them, and they sell them or scrap them at every opportunity. If they cut POW and sell QE they can save a huge amount in knock-on costs (like JCA and Crowsnest), and they can avoid having to give jobs to people who voted for Gordon Brown.
I have to agree with TD on this one. There will be no more money and possibly further cuts. I see some form of MPA being thrown in but very likley the C295 cheap as chips version which will be largely in their like the F35C CATOBAR carrier decision in 2010 as a distraction for the telegraph to give the illusion of a government that cares about defence.
That being said even at the bare bones level of 2% of GDP which i seriously doubt we will drop below no matter the composition of the government we will still be spending $60 billion a year on defence. That’s a lot of money in anyone’s eyes.
So if we assume the budget won’t be increased its time to look at either reducing the spectrum of capabilities or reducing the readiness.
I know I will catch a lot of flack for this comment but give the political risk of another long term Army commitment anywhere other than small UN missions in Africa should we look to reduce Army numbers further. I am looking at the sustainment force in Army 2020 and I can’t help but see it as a what’s left over and how many cap badges can we keep.
Removing this part of Army 2020 should not affect our ability to deploy a one time force of 30,000 which I think is the main thing we should look at the army for. It will cripple our ability to sustain a force of 6,000 but then should we ever consider committing such a large sustained force to an operation again for any reason.
I see further cuts in either the airforce of the navy as getting to the point that the service will be completely usless. with much less than 7 FJ squadrons you have to ask what’s the point in an airforce. if we take the RFTG away from the navy then we may as well dump the rest of it and just have a costal defence force. However an army of around 65,000 could still retain and possibly enhance some of its major formations like 16AAB, 3 Commando and the armoured brigades. if used in a one off that’s still a pretty substantial force compared to anyone else.
I know the army guys will be against this but short of cutting the detterent I just can’t see anything left to cut in the other two service’s that will leave them as a viable forces able to conduct UK soverign operations on any scale.
if all we can do is contribute to coallition operations then one has to ask if the $60 billion a year would be better spent else where.
if we don’t reduce the spectrum then we will need to reduce training and readiness. however I see this move as effectively killing off what make HM Forces amongst the best In the world. Our military has never been about having shinny toys to parade once in a while but having the people witht he ability to use those shinny or not so shinny toys to clobber the enemy no matter what the conditions they have to endure.
Brian Black,
Precisely. When SDSR10 was produced the deficit was meant to be gone by 2015, now it is meant to be gone by 2018 which means further government spending cuts- some of which will almost certainly fall on the MoD.
…which are the remaining dispensable bits of defence spending that we can live without?
CASD and the British Army.
@Derek
“The only difference is a sovereign state can print its own money- but it does so at the risk of inflation and investor confidence vanishing, which if left unchecked causes very serious problems.”
Absolutely right. You could add to that the obvious danger of the state’s currency losing its value and the resultant entry into long-term decline. It’s happened so many times before. Over the long term, a state simply cannot spend more than it’s earning. Even John Maynard Keynes himself said that in the good times (Osborne’s “when the sun is shining”), money should be set aside for the bad times, or words to that effect)
@Chris
“Or we can carry on spending what we don’t earn and fall more & more in debt. Mentioning no Brown.”
Also correct.
I’ve had just about enough of this Leftie/liberal nonsense regarding the economy. Think back to the 1970s. What was happening then? A Labour Government in power. Inflation at 27%; pay rises of 40% in my own profession; banner headlines screaming, “Is this country governable?”; the dead lying unburied in mortuaries, rubbish piled rooftop high on the streets; Britain known as the “sick man of Europe” and the Prime Minister of the time (Mr. Callaghan), when asked what the answer was, replying “If I were a young man, I’d emigrate!” Of course the rationalising apportioned the blame to the oil crisis, just as blame has been attached recently to the bankers, despite the fact that the last administration increased public expenditure by 60% over a decade although during that period on average we were growing at 2%. I think I’d rather be in this country than France at this moment!
Anyway, this is a defence site and I’ll now shut up on the subject.
Economists don’t understand how the economy works, so there’s no point you lot arguing about it.
On the real pounds & pence side of the government’s finances, the chancellor has promised us 25 billions of further cuts between the election and 2018. Welfare is meant to carry 12 of those billions, but that still leaves a tidy wedge for the other departments to find.
How much of that remaining 13 billion quid is coming the MoD’s way? And which are the remaining dispensable bits of defence spending that we can live without?
Chris,
The idea is that GDP will grow and therefore offset the growth in debt- it is for instance possible for a country to increase it’s nominal debt stock but still decrease it’s debt to GDP ratio. This is fine until things get out of control, ie there is some major debt shock like the sudden need to bail out a bunch of Scottish banks at the same time as a 7% peak to trough GDP contraction with corresponding falls in tax revenue. At this point, the UK is still increasing its debt levels and the cost of servicing that debt annually already exceeds the entire defence budget and that is with historically low interest rates.
That should read ‘principle’ not ‘principal’ but the ‘click here to edit’ failed to materialise…
a – I am not a politician nor an economist nor financial expert. I keep things simple so I can understand them. Thus I consider the country to be exactly the same as a household. Therefore the Micawber principal applies:
“Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.”
If by some miracle the country grows richer when the treasury spend exceeds its income, I’d like to understand the mechanism – please explain…
a,
If you had read my earlier posts you would have seen me point out that interest rates rise and then take affect on the outstanding debt stock as it reaches maturity. Interest rates will not remain low, building up a large debt stock whilst interest rates are low builds in risk- the same as taking out a high loan to equity mortgage does during periods of low interest.
Countries can be said to live beyond their means- sovereign debt crisis are very real things, there are a long list of countries that have experienced them. The only difference is a sovereign state can print it’s own money- but it does so at the risk of inflation and investor confidence vanishing, which if left unchecked causes very serious problems. On precisely that subject see Reinhart and Rogoff’s latest IMF working paper with regard to developed world debt levels. http://www.imf.org/external/pubs/ft/wp/2013/wp13266.pdf
On the subject of revenue – I opine that over the past 90 years we have, inch by inch, been manoeuvring towards the situation where we live beyond our means
This isn’t a helpful way to think about national economics. Individuals can be meaningfully said to live beyond their means. Countries are different.
“To keep this on topic though, higher debt interest payments takes money from other government departments- and that is the point.”
But we haven’t GOT higher interest payments. They’re at near-record lows as a share of GDP.
GNB – and more lovely light armour!! No RIP required.
On the subject of revenue – I opine that over the past 90 years we have, inch by inch, been manoeuvring towards the situation where we live beyond our means. At each election there is another promise of extra benefit that must be paid from the public purse, when before the election the party in power declared there was no more cash to spend. I am of a mind that the public payout should skew even just slightly towards encouraging business – specifically exporting business – so that the balance of payments might be improved. A richer country results; richer countries can afford to spend more on their population. Between the (not really affordable) jam yesterday and the (more affordable) jam tomorrow there has to be a bit of dry bread & water. Or we can carry on spending what we don’t earn and fall more & more in debt. Mentioning no Brown.
Anyway Gloomy – what bit of history is your speciality then? The Angevins? The Crusades? Victorian industrialism? I’m guessing earlier rather than later based on knowledge put in comments over the past months…
GNB is spot on (if he were an economist, he would be Dismal rather than Gloomy, I assume) – having a generally transparent and trustworthy legal/fiscal system is probably the UK’s most underestimated natural resource. It’s arguably the reason we were able to beat Napoleon – we could borrow money cheaply because we were trusted to pay it back. The French Empire, not so much.
so the question is how do we factor that into a less economically divided country, and raise more tax revenue to build more ships (RIP@x) or spend more on legal aid (RIP@IXION)…
Oh, well, that’s simple. :)
a,
Using Dec 13 inflation is misleading as it is the lowest rate it has been for years, CPI peaked at over 5% in 2011. Also, just because inflation remains near (but still above) target it does not mean it is not being driven by QE. The Bank of England even said that the purpose of QE was to drive inflation
http://www.publications.parliament.uk/pa/cm201213/cmselect/cmtreasy/writev/qe/m11.htm
There is a difference between GDP growth and government spending, as long as debt is well managed there is no fundamental reason why it should retard growth. However, large interest payments reduce government spending power which over a period of time will eat into investment of things like infrastructure which reduces economic potential. Then of course there is the consequences of debt being badly managed. To keep this on topic though, higher debt interest payments takes money from other government departments- and that is the point.
I’m an Historian (by training) as opposed to an Economist, but my overall sense of the whole debt business is that it’s actually more to do with confidence in the market that in the final analysis the Debtor Country will maintain a stable government, the rule of law and the honouring of contracts…that is to say we will either service our debt or pay it back, not change the rules and steal other people’s money. For the same reason rich people from bad places want a house, a bank account and the right to reside in the UK, the US or a handful of other similarly stable and trusted places; it’s a bit like the belief that the sovereigns we minted in earlier centuries were definitely specie of the weight and quality claimed.
That seems to me to be the reason why we still have a continuing competitive advantage over both the BRICs and the new MINTs…and largely explains the success of the City…so the question is how do we factor that into a less economically divided country, and raise more tax revenue to build more ships (RIP@x) or spend more on legal aid (RIP@IXION)…
Answers on a postcard please…
GNB
This may be a bit off topic for a defence site, but I don’t think it is: if you’re making predictions about defence spending based on suppositions like “the economy is still in the toilet with unsustainable levels of debt” then it’s relevant to point out that current levels of debt are actually a lot lower than they were for most of the last century.
“Actually printing money did drive inflation”
Inflation is 2.1% (Dec 13), which is a four-year low. More than slightly lower than it was in 2009, before QE even started. And it’s not just us: as I say, the US tripled its monetary base and inflation actually fell a bit.
“High UK debt did hold it back”
There is no evidence that high debt levels are significantly related to slow growth. People thought there was, but they were wrong. If you look at when the UK saw its fastest economic growth, it was very often when debt ratios were very high. We had no recessions between 1945 and 1973, and debt load then was far higher than it is today (due to the hangover from WW2).
http://www.cepr.net/index.php/blogs/cepr-blog/the-reinhart-rogoff-debt-to-gdp-error-why-it-matte
Key sentence: “the corrected growth rate is still lower for high debt countries, the difference is much smaller and nowhere close to being statistically significant.”
Well, before QE , I was getting 2.4 Australian dollars to the Pound, but now around $1.80. Before QE 1.5 euros, but now 1.16 Euros. The pound sterling buys less, so though the prices remain the same, I have noticed the quality of High St mens shirts have dropped. Many items in the supermarket are the same price , but smaller in size /weight. High items seem to be excluded from official inflation figures. Housing, energy & travel costs are deemed to trivial to count! There is a lot of hidden inflation about.
Yes we can print as many Pounds as we want, but will any foreign investors touch them without a huge interest premium?
a,
Actually printing money did drive inflation, the Bank of England admitted as much.
High UK debt did hold it back, debt burdens were major features of multiple post-war UK economic crisis (post both world wars) most notably the burden of interest payments.
A few points on economics:
The UK can print more of it’s own currency but in doing so will simply drive inflation which is what happened in part with QE.
The big lesson from the last few years has actually been that increasing the money supply does _not_ automatically cause inflation. Lots of people thought that it would and issued plenty of warnings in 2008-9-10 that high inflation was just round the corner, but they were all wrong. The US managed to triple its monetary base and inflation actually went down substantially. The idea that if there’s more money around then its value will drop is superficially very plausible – after all, that’s what happens if there are lots of, say, apples around, the price of apples goes down – but it turns out that money is different from goods in this respect.
Countries, as people have pointed out above, aren’t like people; they don’t have to balance their books.
There’s no causal link between a high debt-to-GDP ratio (over 90%) and slow growth. Reinhard and Rogoff thought there was but they’d screwed up a spreadsheet and actually there wasn’t.
As a share of GDP (which is one of the only meaningful measures), the UK national debt isn’t particularly high by historical standards. It was higher than this for most of the 20th century and indeed for a lot of the 18th and 19th centuries. Didn’t hold us back. Far from being unsustainable, our current levels are lower than they were during the Industrial Revolution, and lower than they were during the long postwar boom.
In terms of the interest payments, they’re at near-record lows for the last century as a share of GDP.
The interest rate on government debt is not set by the Bank of England. The Bank sets the base rate – which is quite different.
jon livesey,
Unfortunately that debt has to be rolled over, and when it is it is rolled over it will be at the the interest rates at the time- likely to be much higher. The UK can print more of it’s own currency but in doing so will simply drive inflation which is what happened in part with QE.
Financial Institutions do want their money back, that;s how debt markets work, they want somewhere safe to store their money- debt is only safe if it can be paid back. Flows into and out of government bonds are huge.
All three services will individually say they understand the changing defence world and sacred cows need to be looked at and even cut. The problem is they will also say that those sacred cows to be cut are in the other two services.
It looks like the HCDC will be publishing its initial thoughts on preparations for the SDSR, tomorrow: http://www.parliament.uk/business/committees/committees-a-z/commons-select/defence-committee/news/7th-report-tnsdr-part-one/
Given some of the criticism recently from James Arbuthnot, it will be interesting to see what they think, even though it’s ‘just’ a Select Committee.
TD,
Sadly, I think you’re right.
It’s just too risky (from a politicians point of view) to change anything…
“If it ain’t broke don’t fix it”
…trouble is, it is breaking.
John Hartley : Rising interest rates don’t affect existing debt, only new debt, and Carney has said he will keep interest rates at the short end low for a long time. We won’t see 5% for at least five years. At present we pay less in interest as a percentage of GDP than we did back in the eighties, and the average maturity of the debt is 14 years.
That said, national debt isn’t what you seem to think it is. A country with its own currency doesn’t have to “balance the books” ever. We can’t run out of a currency we create. When a financial institution buys UK debt, it’s just buying a tiny sliver of future tax revenue. It doesn’t want to be “paid back”. If you did pay it back, it would simply buy more Government debt to generate risk-free income. Risk-free because a country that borrows in its own currency can never be forced to default. Defaulting on debt in the currency you create is meaningless.
Oh, and yes, we leave paying interest to future generations, but we also leave them the debt the interest is paid on. You can’t take it with you, right?
@John Hartley: I wasn’t aware that Mr Darling was, as the French say, “borgne”. If you want to blame the PM, and many do, then it should be Cameron’s name there and not Osborne’s.
Be that as it may, any change in interest rates will have a relatively small impact on the cost of the public sector debt, always assuming that the deficit really history by 2018 or thereabouts. The average normal gilt had a remaining life of over 15 years at the end of the last fiscal year, and nearer 20 years for index-linked ones. So, it would take a long time for a rise in rates to feed through into spending cuts. Increasing the basic tax allowance to £12,500 in the next parliament, as was mooted last year, would have a greater net impact on available funds than any plausible rise in interest rates. Still, I suppose that from the MoD’s perspective it won’t matter whether there’s no money because interest rates have risen, or because the politicians decided on a tax give-away. The end result is the same.
Any bets on NATO dropping the 2% “rule” anytime soon, or will the fantasy continue a bit longer?
APATS,
Costed and approved only through to 2015/16. The next Comprehensive Spending Review (2014/15) has the potential to bring further nasty surprises. See John Hartley’s post above yours for additional material on the fiscal environment.
@Derek
Indeed, with one further (troubling) caveat: the 1% refers only to the Equipment Plan, and the baseline was reduced by the CSR last year (but not further by the Autumn Statement). The Prime Minister’s ‘strong personal view’ that the Defence Budget as a whole needed ‘real term’ increases after 2015 (and which the original Future Force plan was based on) was only a piece of political theatre, and never regarded as a promise. So although the Department has the unallocated contingency, most of which lies after 2015, and has been able to benefit from some rollover of underspend, it may have to eat into that to offset further cuts and only then begin to think what can be brought off the Single Integrated Priorities List (the ‘whiteboard’) which is where things could get tense between the Services.
If I could, I think the risk point is worthy of more discussion, because it’s one of the areas that changes most depending on what you mean. There does seem to a wider problem with taking casualties, and the coverage they receive (which the services themselves have become concerned about). However, I think we have yet to confirm whether this is because we have become risk averse, or whether it actually relates to the campaigns we have fought and the limited public support they enjoyed. So, with the Falklands in vogue in the other thread, if we had to do that again, do we think we’d still be so risk and casualty averse?
I also raise the point because it’s not clear the Government *is* more risk averse. Yes, they want the forces to suffer fewer casualties because of the media impact (see above), but they also want to still do things. In other words, risk aversion is being focussed at the tactical level, but the government isn’t recognising strategic risk (‘do we want to or can we do this?’). Two examples being the government launching Libya within months of SDSR 2010, and practically champing at the bit to get into Syria, in spite of not-so-subtle warnings from inside MOD.
Incidentally, I’m not sure the colour of government makes much difference. The Conservatives have a history of cutting Defence pretty heavily.
Some reasons for optimism:
1. We know we’re conducting an SDSR, not an SDR this time; we’ve had one go; the National Security machinery is already working across the various strategy groups; any number of studies are already underway within Defence
2. Defence is working from a much more stable financial baseline, with no large holes to close and some ideas about what the financial settlement will look like
3. Most of the major and difficult procurement decisions have effectively been taken (and I’m including the Deterrent in that, perhaps unwisely, but the budget provision over the next ten years is done)
4. The economy is picking up and may provide limited relief for Defence if the ‘NATO targets’ mantra sticks
5. The new Defence operating model should be running better and Joint Forces Command should be playing a more prominent role
But reasons for pessimism:
1. Financial guarantees may not be worth the paper (or email) they’re written on (see recent RUSI analysis)
2. We’re already short of the assumptions on finance and manpower made in 2010 to meet Future Force 2020, with no guarantees the supposed mitigating factors (eg Army reserves) can fill the gaps
3. There’s been little evidence over the past three years of sustained and serious strategic thought by the people that take the decisions (politicians) and that they’ve seriously reflected on what changes in geo-politics (especially the Middle East and US focus) mean for us
4. There is no way of knowing whether the Services will behave as poorly as last time in engaging in utterly destructive briefing and leaking, but I’m not holding my breath given there’s a smaller pie to fight over
5. We haven’t resolved the capabilities v aspiration argument (which is point 3 again)
6. The Election-NSS-SDSR-Spending Review cycle will be difficult again (I need to check but I think there’s a bigger gap from the NSS/SDSR to the Review, which can cut both ways)
So when I’m feeling positive, I think the next NSS and SDSR will be more coherent and result in less mess. But that is tempered by the feeling that it will be much more of a holding action, as TD says, and therefore miss an opportunity to be something conceptually radical.
‘Derek
The equipment plan has however been costed and approved. Also you just posted an exact replica of a Bob post?
In 200 years including fighting Napoleon, 2 world wars, the 1930s/1970s, we had managed to get the National Debt up to £400 billion. Then the one eyed Scottish genius was let loose, followed by Gideon & it is now expected to top out at 1.6 trillion before it starts to fall (slowly). My maths is poor, but if interest rates return to a normal 5%, then that’s £80 billion a year, without paying off a penny of the capital. All 3 parties have their collective heads in the sand over this. Saving a few defence pennies here & there will not make much difference when interest payments are double the defence budget. Join Argentina on defaulting on national debt anyone? Heres to bankruptcy!
TD,
One major point that I think should be underscored. Force 2020 was formulated in 2010 based on optimistic GDP projections and on an assumed 2% real terms increase in defence spending per annum post 2015. In the background was the related assumption that the deficit would be gone by 2015.
The deficit will now not be gone until 2018, which means further cuts. The GDP figures, whilst briefly positive, have up until very recently been decidedly disappointing and the UK is still well below it’s 2007 peak. The treasury has thus far agreed to a 1% increase but this could prove vulnerable.
In short, additional capability reductions are more probable at this point than ticks being placed next to items on wish lists.
Have thought a bit recently about how you might reform a large organisation. Two things always come to the fore one naturally people worry about there jobs and empire building are the two main hurdles I see. If sdsr 15 started with a agreement that no jobs will be lost you may start to see some more willingness to explore other ideas. Empire building much harder to deal with.
Personally I think we should
1. Normal jogging with Trident and replacement.
2. Maintain core, hard to regenerate capabilities (longer than 5+ years) due to global uncertainty.
3. Maintain the ability to launch focused or non-complex BG+ level interventions (the bread and butter of what we will be doing).
3. Piss about the margins with names and numbers and so forth as much as they like as long as the above is maintained in that order.
Of course, every time we have a review we seem to have a war that shows the review was absurd. So who will we be fighting in 2016?!
Likely changes will be minimal;
I expect to see all chat about a new MALE UAV expunged and Sentinel retained. Some vague promise to look at regenerating an MPA capability and lots and lots of discussion about how great T26 is. The carrier question seems to have almost answered itself with Ocean’s retirement in 2019 likely translating into one operational QE with one in refit/extended readiness. The RAF looks settled, some firming up of F-35 numbers, not likely to go beyond the two announced squadrons though and perhaps some noise about UCAV development with France/Europe and Typhoons long term future.
To me, the big question will be over the Army, if recruitment is going as badly as rumour claims then it might see some further shrinkage- the service also has the most outstanding equipment requirements to settle in the form of both upgrades and new build.
@TD – I will try and remember what I typed, but I think it boiled down to saying ‘these threads get quite reptitive and dull after a while as it boils down to those of us who have been there and know the threat being told we don’t know what we are talking about by those who haven’t’! :-)
come to think of it, isnt that what SDSR 15 is likely to be like!
Excellent post, very little to add. In the best case scenario the UK Armed Forces will come out of SDSR15 in roughly the same shape they enter it.
I agree with Sir H. With the caveat that the Scottish referendum would have an impact if it was a yes vote.
Oops, Sir H, managed to accidentally delete your reply on the FI thread
Can you resubmit
Couldnt agree more. I see little scope for any ‘exciting’ or forward looking reviews, more ‘steady as she goes’ and the quality of the force levels / deletions / enhancements will be impacted by Treasury largesse at the time.
Given we are close to half way to reaching Force 2020, and little has changed to alter most of the key judgements underpinning SDSR 2010, I’d see this as more of a tidy up exercise and real deep thinking ocurring in the 2020 review.