The Magic 2% – A Look at the Budget 2015

I have often warned about fixating on the magic 2% of GDP as a means of measuring defence spending for the simple reason it becomes the objective of defence policy.

Much like NHS targets that saw ‘hello nurses‘ being deployed to hit A&E targets the danger is the whole of defence becomes fixated on meeting a single arbitrary target that actually means nothing and has no relation whatsoever to actual needs. Clever sums will be deployed en-masse to ensure the UK meets the NATO target, budgets will be massaged, costs shuffled from one line to another, things will be counted as defence that were not previously and receipts such as fuel transfers to allies and facility rental will all be ruthlessly maximised.

It is all theatre, completely ignoring the sorry state of much of the armed forces.

Every year NATO publish a set of tables showing spending for all the member states using the NATO approved accounting method, click the image to read archive and current versions.

FireShot Capture - NATO - Topic_ Information o_ - http___www.nato.int_cps_en_natohq_topics_49198.htm

Be very careful to read the small print, UK data for example, prior to 2005 did not include pensions. Crucially, it also includes the cost of operations, unlike the MoD’s departmental budget, which does not (operations are funded from the Treasury reserve).

That said, apart from the USA, in 2014 he two joint highest spenders were the UK and Greece.

Estimated figures for 2015 shows a slightly different picture; the UK is at 2.1%, Estonia 2%, Greece 2.4% and Poland 2.2%, all others (except the USA) below 2%.

Let me repeat that, the figures for 2015 are estimated.

The NATO reported figures for the past several years are shown in the table below;

Year Percentage of GDP spent on Defence
1985 5.2
1986 4.9
1987 4.6
1988 3.2
1989 4.1
1990 4.1
1991 4.3
1992 3.8
1993 3.6
1994 3.4
1995 3.1
1996 3
1997 2.7
1998 2.6
1999 2.5
2000 2.5
2001 2.5
2002 2.4
2003 2.4
2004 2.2
2005 2.5
2006 2.4
2007 2.5
2008 2.6
2009 2.6
2010 2.6
2011 2.6
2012 2.2
2013 2.3
2014 2.2
2015 2.1

Dropping these NATO figures into a graph…

UK GDP Defence Spending

As can be seen from the graph there is a marked increase post 2005 that is sustained to 2011, after which it falls off a cliff.

The reasons for this 2005 to 2010/11 ‘hump’ is likely due to two main reasons. First, military pensions are included in the NATO calculation from 2005 and second, the cost of military operations is included. As the cost of operations in Iraq and Afghanistan were significant, the implications for the statistics are obvious, if it wasn’t for these costs, it is likely the current high profile debate on percentage of GDP defence spending would have come sooner.

Before the Budget announcements yesterday, the MoD was invited to save £500m taken from ‘efficiency savings’ only last month and after the obligatory ‘softening up’ campaign by ministers, a confirmation that the MoD’s £450m contribution to the joint MoD/FCO/DFiD Conflict Stability and Security Fund (CSSF) (previously the Global Conflict Prevention Pool) would be included in the official definition of defence spending. There was also a largely unnoticed shift in some definitions of equipment spending that would allow one of the election pledges on equipment spending to be met by including some support costs.

Underhanded.

Since then, there has been a deafening clatter on maintaining spending at the NATO target of 2% of GDP, made worse by David Cameron hectoring everyone at the last NATO summit and the never ending stream of stories about Russian incursions into international airspace, orchestrated I suspect, by those with a vested interest in more defence spending, not the incursions of course, hyping them in the media.

The Budget yesterday confirmed a number of spending commitments on defence and much was made of them, especially by those that are a bit dim or have very short memories. Dressing up 2% tomorrow as some sort of victory given that it is actually a decrease from today seems to be an exercise in kidding oneself.

This was my first reaction.

But enough of my snarkiness.

The Budget Document starts with…

the government will ensure that the UK spends 2% of GDP a year on defence for the rest of the decade

As we all know, a government cannot bind its successor and given the lack of legislation to enshrine this in law, don’t hold your breath for anything beyond.

It goes on to say;

1.81 The first duty of government is to ensure the safety and security of the country and its people. The government remains committed to ensuring real growth of the Ministry of Defence equipment plan of 1% per year and maintaining the size of the Army at 82,000. The government will go further, and this Budget commits to raise the entire Ministry of Defence budget by 0.5% a year in real terms. This Budget also protects overall counter terrorism spending across government, a total of more than £2.0 billion spent by a range of departments, agencies, and the police.

What’s not to like, except of course, defence inflation is currently running at 2.1%, compared with about 1% for the main rate.

You may have seen the defence inflation issue repeated elsewhere.

The additional funding looks good.

1.82 The threats the UK faces are diverse and require coordinated responses from the armed forces, security and counter terrorism agencies. In addition to the annual increase in the defence budget, this Budget announces up to an additional £1.5 billion a year by the end of the Parliament to fund increased spending on the military and intelligence agencies by an average of 1% a year in real terms.

This is welcome, but details remain elusive. It seems that the fund will be split between the intelligence agencies, MoD, FCi and DFiD on a bid by bid basis and increased gradually to the full amount by 2020.

1.83 The final allocation of this additional funding will be determined by the Strategic Defence and Security Review and Spending Review, and is conditional on the armed services and agencies producing further efficiencies within their existing budgets to ensure continued investment in the most important capabilities.

Ah, the final allocation of additional funding is contingent on Captain Efficiency getting on parade, again.

1.84 Allowing for all of the public spending that supports the Ministry of Defence and the contribution made by the secret intelligence agencies, this Budget commits the government to meet the properly measured NATO pledge to spend 2% of national income on defence every year of this decade.

And here is the kicker,the double fudge accounting creativity clause.

The first one is ‘allowing for all public spending that supports the Ministry of Defence’

What public spending supports the MoD, is that simply another way of say the MoD’s budget or spending, or something else.

And

‘the contribution made by the secret intelligence agencies’.

I think we probably understand what the secret intelligence agencies are; MI5, MI6 and GCHQ what what does contribution actually mean. Does it include all of MI5’s budget which would include its contribution to counter espionage and organised crime, or will some proportion of MI5’s costs only devoted to counter terrorism be used to prop up the figures to get to 2%?

Lots of questions here.

Finally, what does ‘properly measured’ mean, does NATO improperly measure them, is there some future argument with NATO brewing on how it does its sums.?

Further in the document these are repeated.

2.22 Defence spending – The Ministry of Defence budget will rise at 0.5% per year in real terms to 2020-21.

2.23 Defence and intelligence spending – The government commits to make available up to an additional £1.5 billion a year by the end of the Parliament to increase spending on the military and intelligence agencies by an average of 1% a year in real terms.

2.24 Meeting the NATO 2% pledge – The government commits to meeting the properly measured NATO pledge to spend 2% of national income on defence every year of this decade.

2.25 Counter terrorism spending – The government commits to protect in real terms counter terrorism spending of more than £2 billion across government

From the Budget Red Book, a handful of others of interest…

2.47 The use of banking fines – The government has committed nearly £70 million of banking fines over the next 5 years to support military charities and other good causes, including:

  • Defence Medical Welfare Services £0.5 million – the provision of welfare services such as magazines to members of the Armed Forces who are in hospital
  • Royal Commonwealth Ex-Services League £5 million – to help ex-Service men and women from the Commonwealth who have served The Crown and are now in need
  • Victoria Cross and George Cross Association £3 million – to increase the annuity for VC and GC holders and to support the 75th Anniversary of the Association
  • Victims of Terrorism Memorial £1 million – to commemorate the UK victims of terrorism overseas through the construction of a new memorial
  • Cadet Expansion Programme (CEP) £50 million – to increase the number of Cadet Units in state schools to 500 by 2020
  • Children’s Air Ambulance £2 million – to increase the service to 2 helicopters by the end of 2016 to enable the Children’s Air Ambulance to extend this free of charge service
  • Ludlow Museum £0.25 million – to facilitate the publication online of the unique and historically important geological collections held in Ludlow
  • Regeneration of the National Memorial Arboretum £2 million – to protect the long term future of the Memorial and to preserve it for the next generation
  • Team Rubicon £2.5 million – to establish in the UK an organisation that uses ex-military personnel to support immediate disaster relief effort overseas
  • Clock Tower Foundation £3 million – to provide a bespoke rehabilitation centre to support the Special Forces
  • Battle of Britain Bunker £1 million – to renovate and maintain the Battle of Britain Operations Room at RAF Uxbridge which coordinated the air defence of London and the South of England in WWII.

Some great examples there but how exactly is photographing a geological collection in Ludlow Museum connected to the rest of the overwhelmingly defence oriented projects?

You may well ask.

THE UK’S LARGEST DEFENCE VEHICLE SHOWCASE TURNS 10

Here is a completely unrelated and random picture of Minister of State for Defence Procurement and MP for Ludlow, Phillip Dunne MP!

(H/T TD Commenter Alex)

The website of Andy Boddington, Shropshire Councillor, reports further on the great news;

Helped by Philip Dunne, John Cherry and Lottie James – chair of the Friends – pitched a case for a slice of Libor funds to the treasury. It must have been a good pitch because the grant to “Ludlow Museum” was one of just eleven Libor awards announced in Wednesday’s budget.

This is no secret of course, Phillip Dunne repeats the good news on his website, click here

And a nice picture

philip_dunne_ludlow_resource_centre.preview

Great news indeed.

The Government also indicated that its estate will be managed on a more commercial basis

Budget 2015 announces that the government will implement a new commercially-driven approach to land and property asset management across the central government estate, based on departments paying market-level rents for the freehold assets they own.

1.85 Given their very large property and land holdings, there is also the potential to generate significant efficiencies within the Ministry of Defence estate. However, the Ministry of Defence maintains a varied estate, including assets of strategic military importance. Therefore, the department will introduce a similar charging mechanism, to the same timescale, within its existing estate management organisation, to incentivise users of the Ministry of Defence estate to reduce their footprint and release value, including land for development.

One thing that I think most of us missed was Pitcairn.

2.259 Marine Protected Area (MPA) at Pitcairn – The government intends to proceed with designation of a MPA around Pitcairn. This will be dependent upon reaching agreement with NGOs on satellite monitoring and with authorities in relevant ports to prevent landing of illegal catch, as well as on identifying a practical naval method of enforcing the MPA at a cost that can be accommodated within existing departmental expenditure limits.

‘within existing departmental expenditure’

What does that mean!

Public sector workers are subject to a 4 year continuation of the previous 4 years wage increase cap of 1% which may very well include MoD civil servants and service personnel.

Following these announcements the usual talking heads, commenters and defence grown ups have been beating a path to the mainstream media’s studios to say what a momentous and great day for defence this tiny increase and exercise is clever sums was.

Perhaps this is what happens when your expectations are so low.

The Chief of the Defence Staff, General Sir Nicholas Houghton, said;

This is a great day for defence. In fact it is a great day for the country, I would say. I think for anybody who has got an interest in the security of the nation, the strategic place internationally of the country, it’s been a good day. There was a risk, perhaps, that we were going to, in military terms, fight a withdrawal, manage decline further. But what this does is give us positive choices for the future.

You could argue that this is a Good Thing™, perhaps even a Great Thing™, but it is difficult to muster a huge amount of enthusiasm, like finding an extra fiver down the back of the sofa and then realising you actually need a tenner.

Let’s not be too churlish though, this is an emphatic stop to the continued decline of defence budgets, a strong political message to the rest of NATO and Mr Putin, a period of funding stability and depending on ‘accounting foo’ a modest increase in actual cash terms to address many of the yawning gaps in capability in defence.

None of the budgetary definition changes are necessarily a bad thing either, quite the opposite in fact, but it is the fundamental underhanded dishonesty and obvious political intent of hitting the 2% figure that that takes the shine off. The changes have not been made because they are a good idea, clearly they have been made to contribute to the political target of 2%.

We all understand political rhetoric and reality are often strangers but one would have hoped that in matters of defence and security, there would be higher standards.

Don’t go spending it all at once chaps.

Pitcairn here we come…

 

24 Comments
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Gloomy Northern Boy
Gloomy Northern Boy
July 9, 2015 9:02 pm

“Gift horse” and “mouth” leap to mind…

GNB

Peter Elliott
July 9, 2015 9:17 pm

TD I’m all in favour of a cynical eye.

Let’s back it up with a table and graph of apples with apples core defence spend: ie with the pensions, military intelligence and operations all stripped out. Overlay a line for GDP%.

Numbers first: commentary second.

Weirdly I do actually buy the “MOD copypasta” about the size of our budget. We ought to be able to do bloody well on what we have. And the current scale of our forces does seem to match the future investments. Can anyone tell me where the next ridiculous overspend waste programme farago is actually coming from? It actually looks quite serene from here.

John Hartley
John Hartley
July 9, 2015 9:25 pm

There is a NATO mil standard for many things. Is there one for calculating defence budgets as a share of GDP? If not, there needs to be a common standard among NATO countries for working it out.

The Other Chris
July 9, 2015 9:25 pm

Combined with a more even MOD spending keel over the last five years, having an idea of what your funding is likely to be for the next five years enables firmer planning and purchasing.

The MOD may have not struck gold during the budget, but they have a more solid basis on which to move forward now. When was the last time they had that?

JK
JK
July 9, 2015 9:33 pm

Ref: “the government will ensure that the UK spends 2% of GDP a year on defence for the rest of the decade.

Which is an interesting start because as we all know, a government cannot bind its successor and given the lack of legilsation to enshrine this in law, don’t hold your breath.”

Well it does say “the rest of the decade” not “the next decade”, by the rest of the decade I’m sure they mean the next five years. I don’t think they mean that even themselves are committed to meeting the 2% after 2020, if they win the next election.

jedibeeftrix
jedibeeftrix
July 9, 2015 9:55 pm

Congrats boss, you veered all over the shop and covered just about every position its possible.to take on this statement at some point or other! :-)

@ jk – “Well it does say “the rest of the decade” not “the next decade”, by the rest of the decade I’m sure they mean the next five years. I don’t think they mean that even themselves are committed to meeting the 2% after 2020, if they win the next election.”

And yet:
1. They are making 2.0% a political fact on the ground, more difficult to breech in future that it would today as ‘inevitable decline’.
2. You can only add pensions in once, lilewise for intelligence, but the pressures of the wefare state are forever increasing.

The line was held. Well done, both politically, and for the stability of uk defen e.

2.0% also matters as a statement of importance defence has in eyes of government to the people they govern. The continental norm is 1.4% and sinking, is that what you want for britain, with all that implies for our (activist) foriegn policy?

Peter Elliott
July 9, 2015 10:01 pm

When was the last time UK defence had a robust looking 5 year settlement to plan around?

jedibeeftrix
jedibeeftrix
July 9, 2015 10:04 pm

Nobody expected this, it is quite frankly a.bloody miracle that during a time when govt spending slides for 44% of gdp to 36% that defences is maintained at 2.0% in the face of the expectation of working benefits and a increasing crumblies.

Peter Elliott
July 9, 2015 10:14 pm

Thank that nice Mr Putin and the assorted Mad Mullahs of the Middle East ;)

Martin
Martin
July 10, 2015 2:01 am

well done TD, a very in depth look at what the commitment will actually entail. However I don’t share much of your pessimism. Given just how large the budget is and the fact that it is unlikely to be cut substantially I think we can do more with better planning.

Atleast the MOD now knows exactly what kind of brown ale it can afford and can make its plans accordingly. Those check 8×8’s are looking pretty good now. :-)

ForcesReviewUK
ForcesReviewUK
July 10, 2015 3:05 am

No one is ever happy. It’s all “more, more and definitely more and not some nonsense figure, more”.

mr.fred
mr.fred
July 10, 2015 6:56 am

Martin,
It’s Czech, but the Rosomak is Polish.

jedibeeftrix
jedibeeftrix
July 10, 2015 7:29 am

quote from the IFS:

“He said that the government’s decision to protect defence spending will see deeper cuts in other unprotected departments, which will have seen their budgets fall by a third by the end of the decade. There will be £19billion worth of cuts over the next four years.”

Narses
Narses
July 10, 2015 8:04 am

Due to my screen’s scrolling position I saw: “Pitcairn here we come…” and only the photo, and none of the text below, of Prince Andrew (I assume), the Navy chaps and David Beckham in a canoe – spat my tea everywhere………….

Howard
Howard
July 10, 2015 10:11 am

Let ‘s not forget that the government are predicting that the economy will grow at around 2.5% for the next few years. In 5 years that’s over 13% compounded. Even if they do cook the books a little they are going to have to find some real money to keep to the 2% of GDP target. Not too shabby.

monkey
monkey
July 10, 2015 11:53 am

2.23 Defence and intelligence spending – The government commits to make available up to an additional £1.5 billion a year by the end of the Parliament to increase spending on the military and intelligence agencies by an average of 1% a year in real terms.”
This reads to me that defence spending will increase by no more than ,’up to’, £1.5bn over the next 5 years but guaranteeing 1% growth regardless of GDP moving up or down.
All in all though it should give the SDSR 2015 planners fixed figures to work with at least for the next five years.
That should see :-
Queen Elizabeth in service (PoW close to)
MARS RFA in service
FRES SV in service
F35B in service
T26. in service
S boats on the stocks
Tonkas gone
Tiffies with full ground attack capability
Warrior sustainment in service
All the Astutes in service or on the stocks
MPA ( if its P8A) in service.
A400M well the way to replacing C130

El Sid
El Sid
July 10, 2015 1:13 pm

http://www.ft.com/cms/s/0/08e9e07a-c746-11e4-8e1f-00144feab7de.html

“A second government figure confirmed that officials were looking closely at what Nato classifies as defence spending to see if different member states include different elements to meet their target…

Nato pointed out that the alliance’s agreed definition of defence spending could only be amended by a consensus of all 28 members but there appears to be plenty of scope for flexibility in its interpretation.

Mr Cameron said: “I have responsibility to make sure we make the right decisions about defence and other security spending. I look at these things in the round, so I am also concerned about the budget for MI5, the Secret Intelligence Service, GCHQ, counter-terrorism policing. To me all of these things are part of our national defence.””

I hadn’t realised that the Single Intelligence Account isn’t already counted as defence spending – so that’s £1.9bn that can be included that isn’t already, plus £800m of war pensions going into the NATO pot from this year

JamesF
July 10, 2015 1:31 pm

@monkey, the 1.5Bn/year is going to a new Joint Security Fund, accessible by MoD, DFID, Intelligence Agencies and FCO. It will not be used for equipment but for counter-terrorism most likely, and probably to encourage jointery. It will be directly controlled by the National Security Council and not by MOD. http://www.bbc.co.uk/news/uk-33469450.

MoD will get a 0.5% increase in budget over inflation each year until 2020.

Alex
Alex
July 10, 2015 4:11 pm

Ludlow Museum £0.25 million – to facilitate the publication online of the unique and historically important geological collections held in Ludlow

£250,000 to take photos of some rocks? and a Budget namecheck? who’s MP for Ludlow? Philip Dunne apparently: http://www.theyworkforyou.com/mp/11696/philip_dunne/ludlow

WiseApe
July 10, 2015 8:23 pm

When did the minimum become an aspiration? {insert frowny face here}

The Other Chris
July 10, 2015 8:54 pm

@Alex

We’ve got to pay for our Black Projects somehow.

Aubrey's Shadow
Aubrey's Shadow
July 11, 2015 7:41 am

Exactly – as the £40Bn stuffed into 750 quangos adequately demonstrates. Un-pick that lot :)

DavidNiven
DavidNiven
July 11, 2015 7:48 am

‘When did the minimum become an aspiration?’

When less than the minimum was looking likely. Cameron gobbing off in Wales was probably defence’s saving grace in terms of putting the brakes on the downward spiral. I think the 2% pledge had more to do with international politics (especially the views of the US) rather than domestic opinion.