Oral evidence: Shifting the goalposts? Defence expenditure and the 2% pledge, HC 494
Tuesday 1 December 2015
Ordered by the House of Commons to be published on 1 December 2015.
Written evidence from witnesses:
Watch the meeting – Shifting the goalposts? Defence expenditure and the 2% pledge
Members present: Dr Julian Lewis (Chair); Richard Benyon; Douglas Chapman; Mr James Gray; Johnny Mercer; Mrs Madeleine Moon; Jim Shannon; Ruth Smeeth
Questions 96–119
Witness[es]: Rt Hon Michael Fallon MP, Secretary of State for Defence, Air Marshal Sir Stephen Hillier KCB CBE DFC RAF, Deputy Chief of the Defence Staff (Capability), and Peter Watkins, Director General for Security Policy, gave evidence.
Q96 Jim Shannon: Secretary of State, one of the things that has concerned us on the Committee, and people outside the Committee, is the 2% of GDP spend. Many of us feel, and there is speculation out there, that we have seen a movement of moneys; in other words, there are moneys coming from the Foreign and Commonwealth Office and the Home Office for intelligence services, for example—
Mr Gray: On a point of order, Chair. General Messenger is leaving.
Chair: Thank you very much for giving evidence, General. Sorry, Jim; please continue.
Jim Shannon: The question, Secretary of State, is: can you confirm that the 2% is moneys specifically targeted and set aside for the services? On the foreign aid budget, much of its work through DFID, for instance, in Sierra Leone and elsewhere, has involved the Ministry of Defence and its personnel. Sometimes I wonder whether the Ministry of Defence is being used to do some of the work that DFID does. If that is the case, are those moneys exchanged as well? The question is really whether the GDP is targeted specifically at service personnel. Is it money moved from elsewhere? There is also the question about DFID and the foreign aid budget.
Michael Fallon: First of all, let me make it clear that there is new money from the settlement in July available for defence. It is really from three sources. The budget itself will increase by 0.5% above inflation for every year of this Parliament. Secondly, we will have access to the brand-new joint security fund; the details of that and of how much access there is are in the SDSR. Thirdly, as a key part of the July settlement, we are able to reinvest our efficiency savings directly in our own programmes rather than seeing them recouped by the Treasury. This is all about new money.
Q97 Jim Shannon: And on the DFID question?
Michael Fallon: Perhaps Mr Watkins can answer on DFID, but yes, we reclaim the cost where the military are directly involved: the cost of operations; some of the expenditure involved in Operation Gritrock in Sierra Leone, for example; the humanitarian relief we might provide to Nepal or other areas. We can then recoup it from the DFID budget. Perhaps you would allow Mr Watkins, who has been silent almost all morning, to add a comment about that.
Peter Watkins: If I could go back to your earlier question, Mr Shannon, we comply with NATO guidelines, in terms of the 2%. The guidelines allow us to include public spending that contributes to our defence. The vast bulk of that, obviously, is money that is actually spent by the Ministry of Defence, but we can report some money within other funds: for example, the conflict, stability and security fund. We include some expenditure from that, and we control that fund jointly with DFID. We work very closely with DFID on a whole range of activities, as the Secretary of State says, and where appropriate, we reclaim from DFID’s budget, but we also work with them on a whole raft of activities where we bring particular skills to bear that only we have.
Q98 Richard Benyon: Secretary of State, you said that that is new money. That would mean that the additional 14%—about £5.7 billion to the defence budget—is new money; I just want you to confirm that, if you would. Could you also say whether you are confident that our defence expenditure will qualify for the NATO definition of “under 2%”?
Michael Fallon: On the first question, I do not wholly recognise the £5.7 billion you are quoting.
Q99 Richard Benyon: “Exceeding the NATO 2% target until 2021 has been achieved by adding 14%”, according to the information that we have received.
Peter Watkins: If I could just add to that, I think the £5.7 billion is a figure calculated by Professor Chalmers of RUSI, who has used a whole raft of assumptions and so on. We do not necessarily have complete insight into them.
Q100 Richard Benyon: What would you suggest the figure is?
Air Marshal Sir Stephen Hillier: According to the figure to which we are working in the first five years, we will add £11 billion worth of spending power to allow us to enhance capabilities. As the Secretary of State has said, some of that comes from the joint security fund, some of it comes from re-prioritisation of the spend that we were already assuming and the majority of it comes from an efficiency programme in defence. That is where we get the additional capability from.
Michael Fallon: There was a second question there about who defines what defence spending is. In the end, in terms of the 2% classification, it is for NATO to define whether or not any member state’s return properly meets the NATO guidelines. That will be for them to rule on.
Q101 Chair: May I check one point with you? One of our earlier witnesses was Professor Julian Lindley-French, with whom I am sure you are conversant. He has estimated that while there is no question of anything that is being included in the calculation of 2% falling outside NATO guidelines, if it were to be calculated on the same basis as we have hitherto chosen to calculate it, our percentage of GDP spent on defence could come in as low as 1.7%. Accepting the fact that the Government are perfectly entitled to include these other items that have been shifted from other budgets in the calculation, do you nevertheless accept that comparing like with like, we will be falling below 2%?
Michael Fallon: No, absolutely not. Member states including us have changed; we have added to the returns and made these various changes as the years have gone by. When you say that things have been added from other budgets, you have to ask how else should war pension payments, for example, be classified. They come out of the defence budget. I do not think they can be classified as anyone else’s budget. Member states can choose and do choose to alter the precise amounts that they submit in their annual return, but those things all have to fall within the NATO guidelines, and it is for NATO to say what is correctly included and what is not.
Q102 Chair: No one is suggesting that such things as war pensions should come out of any other budget than the defence budget, but it is a fact, is it not, that in years gone by we have not included such items in our calculation of the percentage of GDP spent on defence, and now we are?
Michael Fallon: We have made changes over the years, and not just this year. Successive Governments have made changes in their annual returns, and they are fully entitled to do that. Other members of NATO do the same.
Peter Watkins: I would just add, Mr Chairman, that the nature of defence spending inevitably changes. In the past, we included a very large sum of money for current operations, such as Afghanistan, but we are not reporting anything like that sum of money anymore. Equally, in terms of the risks and threats that we face in defence, cyber is a much bigger issue than it was in the past, and we therefore rightly include money for cyber. To go back to some fixed position in the past and compare it with now is difficult, because the position is constantly adjusting with reality.
Q103 Chair: But it is also true that the previous Labour Government used to count in the cost of operations to say that defence expenditure over Tony Blair’s 10-year period as Prime Minister had remained roughly constant, as he used to say, at 2.5% of GDP. It was often questioned at the time why those sums for operations were being included when in fact they should be and were being met from the Treasury reserve. I do not think that that is necessarily the best example you could use, because it was contentious at the time when the Treasury reserve expenditure on operations was being counted by the Government to boost the figure from 2.1% to 2.5%.
Peter Watkins: Perhaps it was contentious, Mr Chairman, but the NATO guidelines say that we can count towards that figure any expenditure on defence, regardless of who is funding it within Government.
Q104 Mrs Moon: Secretary of State, can you confirm an area that has been a little confused? The Prime Minister announced an additional—“additional” was the word used—£2 billion for special forces and £1.9 billion of additional money for cyber. Is it new money or money from the existing budget that is being diverted into those areas?
Michael Fallon: The announcement of the additional money for special forces happened to pre-date the SDSR, if I am correct, by three or four weeks.
Q105 Mrs Moon: I think it was the week before. It was a matter of days.
Michael Fallon: The week before, whatever. It is part of the overall settlement. It derives from the additional money that I have been speaking about. Air Marshal, can you answer on cyber?
Air Marshal Sir Stephen Hillier: The same principle applies. Taking the £2 billion for special forces, given the efficiencies we have generated and that real-terms growth of 0.5% each year in the defence budget, we prioritised and that £2 billion is more capability for special forces than they were previously planning to have. It is genuine new capability for them delivered from the sort of areas that I have mentioned. The same principle applies for the cyber funding, although that is clearly a cross-Government effort, too.
Q106 Mrs Moon: Given your exchange with the Chairman about the cost of operations, will the cost of additional operations in Syria come out of the defence budget or the Treasury reserve?
Peter Watkins: I imagine we are discussing that even now with the Treasury. In terms of current operations in Iraq, it has come from the reserve.
Michael Fallon: I think today we have given a figure for operations to 31 March next year—in other words, I think we have given the figure from August, September last year up until the end of March.
Q107 Mrs Moon: How much was that?
Michael Fallon: From memory, it was around £80 million, but I stand to be corrected—I am trying to do this from memory. I am afraid that I don’t have the figures on that.
Q108 Ruth Smeeth: I am not sure whether this is a question for the Secretary of State but, given the scepticism on 2%, can we have a breakdown of how the budget will be comprised on a percentage basis? For example, what percentage of it is being spent on cyber, on equipment and on R and D? I assume that you will not have those figures handy.
Peter Watkins: I think we do.
Air Marshal Sir Steven Hillier: I can give some insight. Based on our return to NATO, it will be 23% on equipment, 38% on personnel—that is military and civilian—3% on infrastructure, and then there is the other 36% covering a range of things from operations, maintenance, research and development, et cetera. On your specific question about science and technology, we committed to 1.2% of the defence budget in the SDSR, and we will sustain that. Clearly, we spend a larger amount on R and D in the round, probably in excess of £1 billion, so there is a difference between what is spent through the science and technology budget versus research and development in the DE&S.
Q109 Ruth Smeeth: And cyber?
Air Marshal Sir Stephen Hillier: I do not have the exact percentages, but I can give you that figure. It is considerably more than we were previously planning to spend, given the importance of the area.
Q110 Chair: Thank you. This is another percentage-focused question. The CDS stated at RUSI in December 2013: “The historic service-centric, major equipment focus has left us…critically deficient in the capabilities which enable the joint force. Such things as intelligence, surveillance, compatible communications, joint logistics and tactical transport.” According to the MOD’s “SDSR 2015 defence key facts”, the 2015 defence budget, at 2% of GDP, is £34.4 billion. Research and development is allocated 2.9% of that sum, which is £1 billion within the defence budget. The SDSR states that only 1.2%, amounting to £0.4 billion, will be spent on science and technology. Is that sufficient to fill the strategic capability gaps in areas such as information, communications and knowledge, allowing Britain to operate effectively in these domains?
Michael Fallon: Let me start, and then Sir Stephen Hillier will come in. First, I think you are right to draw a distinction between the science budget, which is a component of the bigger research and development budget. The science programme is around 1.2% of the total defence budget, and it is a component of the overall R and D spend. As a consequence of this SDSR, we will be able to invest more in joint enablers, intelligence, surveillance and communications, both in the equipment programme and, more generally, in the defence programme. Sir Stephen will give you some more details.
Air Marshal Sir Stephen Hillier: In terms of the headline, by far the greatest proportion of the investment plan that we developed in the SDSR will go to those joint enabling capabilities, as the Secretary of State mentioned. So we absolutely were focused on the sort of areas that CDS mentioned a couple of years ago.
With the proportion between R and D and science and technology, again, the Secretary of State has covered that, but what I would also mention is that we highlighted in the SDSR a new drive to more innovation and that we wanted to try to exploit better the S and T spend and the R and D spend that we put into defence, to look to different ways of developing our capability in the future. You need to look at it as that entire package. I think that if we were to add it all up it would look transformational in terms of how defence is looking towards the future.
Chair: Thank you. Douglas, on Trident I believe.
Q111 Douglas Chapman: Thank you very much. Secretary of State, in terms of the figures that were produced on Trident and its replacement, how robust do you feel the costings are, the £31 billion and contingency funding of a further £10 billion for the Trident successor programme? Given that we are not yet at a maingate decision, how confident are you—how sure can you be—about these costs not rising in the future?
Michael Fallon: We thought it important to refresh the previous estimates, which are fairly dated as to what the successor programme would cost. We have subjected them to scrutiny, not just inside the Ministry but across Whitehall as a whole, and our current estimate is that they would be £31 billion. But we also think it important to learn from some of the other very large complex programmes that have been funded, such as the 2012 Olympics, and to allow a generous element of contingency, which is why we have put in a figure as large as £10 billion, which would be around 35% of the total cost. But in terms of robustness, yes, I am reasonably confident that these are the most reliable estimates that we can provide today.
Q112 Douglas Chapman: Some of the evidence we have taken over recent weeks has raised an issue about the whole force. If the MOD does take control over the whole of the Trident replacement programme, in terms of financing, does that not put huge pressure on other parts of the defence budget, meaning that we are looking again at fewer Type 26s and fewer F38s, and does it not start to undermine the training and state of readiness of our more conventional forces if so much is put into the Trident programme and there are further overruns?
Michael Fallon: No. We have always planned our defence spending on the basis that we can afford both conventional and nuclear forces, and we have always accounted for the successor programme to fall as part of our defence equipment programme. That has always been planned, although of course for the 10 years of the programme that we have now set out you would not necessarily have the final three of the four submarines falling within that. But we have always planned it to fit alongside the conventional side and we can afford to do both.
As far as frigates are concerned, I hope that you would welcome the news that we are not only going to maintain the size of the current fleet of frigates and destroyers, but are looking to develop a slightly lighter form of frigate that could add to the current fleet and give us larger numbers than we have at the moment. I would have hoped you would welcome that, not least because these frigates may well be built in Scotland.
Q113 Douglas Chapman: As you know, Secretary of State, those are not the numbers we were quite expecting as of last year. However, let me ask just one further question, just to move it on slightly to the Vanguard class submarines that are in operation at the moment. They were due to retire in the 2020s, and that date has now been extended into the 2030s. Again, the Committee heard evidence just last week on concerns about the safety and the operational maintenance issues of these submarines if their life is extended to run for up to another 10 years. Again, in terms of costing and safety, I would need reassurance from the Government that these matters were being looked at very seriously and that every effort was being made to ensure that these were not cost overruns, which would be unacceptable.
Michael Fallon: First, let me make it clear that the 2010 SDSR did state that we could safely manage and maintain the Vanguard boats into the early 2030s, so this is not a new thing. It was trailed at least five years ago. Our design and other work on the Successor boats have given us a better understanding of the programme since 2010 but I can give you the reassurance you want: there will absolutely not be any compromise on safety. There has not been in the Trident programme as a whole until now and there certainly will not be as we continue to design the Successor boats and they sequentially replace the Vanguards.
Q114 Chair: Thank you very much. There are just a few quick points arising out of what has been said. On the question of the frigates, I very much take the point that the idea would be to have larger numbers. Are you saying that there will be at least five, and probably more, of the new, lighter variants of the frigates, thus raising the total number of frigates—Type 26 and the lighter variant—to more than 13?
Michael Fallon: Yes, we want to hold that prospect out. We want to see developed a lighter frigate that could fill the gap between the high-end war fighting you need in a frigate and some of the other duties on which the Type 23s are, at the moment, employed but, if you like—I must be careful not to upset the Navy here—are perhaps slightly overqualified for. We think there is a role for a lighter frigate in the middle. If we are able to successfully develop that, they could be additional to the fleet of 19, which is the point you are making.
Q115 Chair: It is indeed. In any event, there will not be fewer than five of them.
Michael Fallon: We have said in the SDSR—
Chair: Yes.
Michael Fallon: Sorry, fewer than five?
Q116 Chair: There will not be fewer than five of the lighter ones in addition to the eight of the Type 26, thus giving you a minimum of 13.
Michael Fallon: I am just looking at the exact phrasing.
Air Marshal Sir Stephen Hillier: If I might, we committed that we would continue with 19 frigates and destroyers, six Type 45s, eight Type 26s and, as the Secretary of State said, a minimum of five additional frigates.
Chair: That is precisely the assurance that I wanted. Thanks very much.
Michael Fallon: It will, I am afraid, be dependent on the study we are commissioning as to whether we can get to a lighter form of frigate.
Q117 Chair: Very good. Secondly, and just two more questions—on the question of the limitations of the Defence budget, you indicated in your answer to Douglas that you had allowed for a balance between conventional and nuclear. Are you also allowing for a similar balance between the competing potential threats of a revival of Russian hostility in Europe on one hand and the fight against international Islamist terrorism on the other? Have we the capability to safeguard against both very different types of threat?
Michael Fallon: Yes, and that is one of the things that the SDSR makes very clear. The threats are set out in the assessment but I think you will see a realism about this SDSR that translates into the hard power that we are renewing and, indeed, adding to over the next few years. That will not help us in the battle against international terrorists, although that is a very immediate threat, but it will enable us to cope with some of the more obvious state aggression that we have seen, most spectacularly from Russian activity in Crimea and Ukraine and, indeed, enhanced Russian maritime and aviation activity. The answer to that is yes.
Q118 Chair: Thank you. Finally—you will be relieved to know after this very long session for which we thank you—much has been made in the Prime Minister’s statement to the House, in the SDSR and in the media about the formation of the two new strike brigades for the Army. Why is it taking another 10 years before these formations will be combat-ready? Why was the reduction in the number of armoured infantry brigades from three to two not mentioned in the SDSR? Will there be a drop in the Army’s fighting power and readiness in the interim?
Michael Fallon: Absolutely not, no. We always set out a 10-year headmark. We did that in 2010 and will do that again in the next review. It was a 10-year headmark of where we absolutely want to be in 2025, but that does not mean that we do not have some of the capabilities at the moment. As you know, we have the Air Assault Brigade and the Commando Brigade. What we are describing in this is exactly where we want to get to and the way in which we can do it in a coherent and affordable way. While we’re doing that, we can use the brigades for a whole range of different tasks, such as counter-terrorism operations, long before we get to that particular headmark of 2025. Perhaps I could ask Mr Watkins to add to that.
Peter Watkins: I think the only thing that I would add—Steve might also want to add to this—is that that period of time is a headmark, as the Secretary of State says, but it also enables the Army to bring into service the new Ajax vehicle, upon which the new strike brigades will be based.
Air Marshal Sir Stephen Hillier: I would just add further that it is a transformational process, so we will start to grow those new strike brigades from 2018 and we will start to have a solid operational capability from 2021 when, as Peter said, the new vehicles come into service. By 2025, we will be fully up and running. We are on a journey. Have we reduced capability? Quite the opposite. The aim is to give us more agile, flexible, deployable forces, which will enhance our capability, rather than reduce it.
Q119 Chair: This Committee is always very keen on flexibility. I would like to thank you all for your flexibility in terms of answering questions of a very different nature from that originally intended. Will you, Secretary of State, undertake to have a look at some of the questions that we would have liked to have asked but had to leave to one side and answer in writing? We would very much appreciate that.
Michael Fallon: I will certainly see whether we can do that. If I am allowed one tiny postscript, I did give one figure of £80 million from memory to Mrs Moon. If that is incorrect, I hope that you will allow me to correct it.
Chair: Thank you very much.
Oral evidence: Shifting the goalposts? Defence expenditure and the 2% pledge, HC 494 8