Defence Secretary Gavin Williamson warned that currency fluctuations will have an adverse effect on the ability of the UK to purchase new equipment, despite previous claims from the Government that exchange rates would have ‘no impact’.

Mr Paul Sweeney, MP for Glasgow North East asked today during a defence debate in the House of Commons:

“The House learned from the defence debate on Thursday that one of the cruxes of the issue of defence budget pressures is the fact that the defence rate of inflation is considerably higher than the national rate. Year on year, it erodes the purchasing power of defence. However, the Ministry of Defence and the Treasury stopped measuring the defence inflation rate last year. As a part of the review, will the Secretary of State commit himself to reinstating measurement of defence inflation, and, in order to be truly fiscally neutral, will he ensure that the annual defence budget increases are pegged to the defence rate of inflation?”

Defence Secretary Gavin Williamson responded:

“That is a very important comment. Foreign exchange rates have had an adverse effect on our ability to buy equipment such as the F-35 fighter jet. We will always be happy to look at suggestions such as the one made by the hon. Gentleman, and I will certainly raise it with the Treasury, but I cannot guarantee the response.”

Claims over the last year from the MoD however had insisted there would be no impact, with various ministers echoing these claims via press releases to the media and in the House of Commons. In July last year, Harriet Baldwin said regarding a recent media piece on the F-35 programme:

“I want to reassure colleagues on the stories in The Times this week about the F-35 joint strike fighter. We strongly disagree with the conclusions that the journalists came to. We are confident that the programme is within its budget envelope, despite the fluctuation in the exchange rate.”

The risks to the affordability of the Ministry of Defence Equipment Plan are greater than at any point since reporting began in 2012, according to a report last year from the National Audit Office.

Spending on equipment and associated support in the 2016 Plan is projected to be £178 billion, an increase of 7%, compared to an increase of just 1.2% between 2013 and 2015. The Strategic Defence and Security Review added £24.4 billion of new commitments to the MoD budget, including the Mechanised Infantry Vehicle, the Poseidon Maritime Patrol Aircraft and an acceleration of purchases of the F-35 Joint Strike Fighter.

In order to meet the funding requirements proposed by the Review, the MoD must use the entirety of the £10.7 billion headroom previously set aside to meet emerging requirements in future years say the report. To further ensure the affordability of the Plan, the MoD must also find £5.8 billion of savings from existing projects in the next 10 years.

George Allison
George Allison
George has a degree in Cyber Security from Glasgow Caledonian University and has a keen interest in naval and cyber security matters and has appeared on national radio and television to discuss current events. George is on Twitter at @geoallison
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39 COMMENTS

  1. At least he is being honest for a change – now the Treasury must make additional funds available. I favour from the international aid budget – justify it for RFA ships on humanitarian missions, P-8s for rescue as well as Russian monitoring etc. Depending on the source, the interest on our national debt is £33-46 billion a year. That’s another area to be attacked – can we negotiate lower interest rates or similar? Such a shocking waste of money. Finally, with the lower exchange rate and UK manufacturing doing the best it has for 10 years, let’s actually try and sell some serious hardware overseas – the type 31 has a lot of interest in various markets, including the US. Get the government to support it 100% and push the unit cost down!

    • we pay very little on our national debt – it almost certainly cannot be lowered. The problem is there is so much of it and as the interest rate is low it kind of provides an excuse to borrow as ultimately it is negligible, apart from the fact the debt is constantly going up.

  2. Highlights the insanely of not fully budgeting for the defence costs and with it hedging the exchange rates. Ok you can’t fully hedge, but would think you could do something.

  3. Obviously a low Pound impacts the cost of buying kit from abroad. Fortunately, the value of the Pound has been increasing recently.

  4. Manning is a big cost to the MOD, as it is to industry. Defence is one area where the possibility of developing unmanned or lightly manned vehicles, ships and planes could be given top priority. I’m aware that unmanned or autonomous systems, are not necessarily less expensive per unit, but in conjunction with reduced manning, a net saving is a possibility over the lifetime of the kit?

    I know there are many autonomous /unmanned systems being seriously developed to replace personnel, where remote control from a local command centre, in conjunction with air drones could be effectively be deployed. Over time manning could be dramatically reduced just as it’s envisaged to do across societies? Fewer feet on the ground could result in far fewer numbers of forces housing, schools, and supporting infrastructure and land estates. I’m convinced there are numerous roles and functions both on the battlefield, and support that could morph into remote functions?

    • Sorry, but must disagree with you there. The UAV/Unmanned systems should not be used as a replacement for boots on the ground but as force multipliers. There are a number of reasons why. If in the future we undertake another Afghan style operation. It is absolutely essential that there is enough boots on the ground but also enough to hold that ground. A UAV/Unmanned system cannot achieve this mission.
      However, if they’re used as a force multiplier e.g. providing local over-watch and reconnaissance when used in conjunction with troops on the ground. The situational awareness it provides local commanders is a quantum leap in how to manage your area of responsibility and how you arrange and apply your force structure. Further, depending on their size, they can provide local fire support.
      The biggest trouble with UAVs/Unmanned systems is when fighting a near pear or peer to peer opponent. This brings to the party your opponents ECM capabilities, but also their cyber prowess. Therefore there is significant risk of UAVs operating near the front line or generally, especially if the vehicle is controlled out of line of sight and reliant on satellite communication – oops I’ve accidentally steered an old satellite into your geosynchronous military comm’s satellite! Just imagine what that would mean for our forces. For starters we would loose all long secure long distance comm’s (voice/data/pictures etc), secondly we would loose long distance control over UAVs.
      Therefore to maintain the operational tempo and control we must ensure that we have sufficient troops and equipment that can operate successfully without the reliance on UAVs!

  6. This should be a non-issue – If the MOD cannot sort out its exchange hedging – most of the companies it deals with will.

    All the big players will trade in £’s at a fixed point in time and hedge themselves – they are used to it.

    So I do not actually believe this statement – unless of course w have tried to be too smart ourselves.

    Its clear from the Carillion situation that the way government does business is broken.

    Lastly – the exchange rate to dollars has been fairly stable all things considered, so again I dont think this should be an issue. Defence inflation on the other hand is a massive issue.

    • I should also add that when the $ has been low against the £ we dont seem to have taken advantage of that either…. so I really dont buy this argument at all

      Apaches are costing us $20m – that is circa $40m less than last time we bought them. Same could be said for the JLTV and P8 – absolute bargains when set against what they are replacing.

      Even an F35 is coming in at or lower than a Typhoon… so exchange rates are irrelevant for the most part if the price itself is coming down.

    • I wouldn’t call the £ to $ exchange rate stable Pacman – it’s gone from $1.20 to $1.38 over the last year. Back in 2015 it was nearer $1.60.

      • The Mod use a standard $1.3 for most of their projections. Also take a look at the exchange rate over the last 10 years – it has always had a range similar to this or wider.

        For professionals who deal in currency this is nothing – really.

      • Mark L – One could also point out the £ was @ $1.39 in Feb 2016 and no one said a word. Its @ 31.38 now.

    • Yes Pacman, I do not understand this problem. Companies hold reserves of dollars to hedge on the Cable market which is a huge market. I do not understand why more UK companies do not do this and trade and self-subsidise to offset many issues. But keep the trading side separate in case things go wrong, A! Porsche made more money from hedging and trading few times than making cars a little while ago…. They are in the perfect Country to do this too. As for the MOD and UK Gov, why this an issue, I do not know. But if it is, maybe a little more could be made here in the future?

    • Oh shut up and actually read a book. What economically illiterate morons never seem to get is currencies fluctuate and have fluctuated for time immemorial. $ vs £ exchange rates have hovered in a range of $1.40 – $1.80 to £1 with dips and bursts above that range since the mid seventies. With the average being $1.66 and that is only because that average takes in the value before the pounds sharp decline in the late seventies. When you exclude the overvalued exchange rate of the seventies and start at 1985 (lowest valuation ever $1.11)then you have a better idea of the consistency.
      So no it I wouldn’t say it was leave voters who did this. Do not confuse the natural effects of economic cycles for the actions of the patriots. Versus those willing to sell their souls to people in another land for a few euros and a pat on the head from Chancellor Merkel and her over payed lackey Junker.

        • Will – Being a British patriot is only a crime in the eyes of Lefties and EU Luvvies for whom it is perfectly OK to be EU patriots.

          I believe in my country, its history and its future because I believe in our people and our character and what we can achieve. If that is a crime well so be it ….

    • Jas – I happily plead ‘Guilty’ to voting ‘Leave’. I am old enough to have voted Heath in and then voted ‘remain’ in ’75 when I was 28. The EEC of 10 similar nations was an excellent arrangement and working in international transport and logistics I saw the benefits. Had it remained as such there would never have needed to be a Referendum

      What you people who happily abuse us Brexiteers forget is that a) we were never EVER asked about the EU (Blair promised twice and reneged) and we saw 20 years of creeping Socialist political union and expansion to 28 nations 22 of which are nett takers while we are the second largest contributor after we had our rebate halved (Mr Blair again). It is by any definition a Ponzi scheme especially with QMV when 22 votes are bought with cash from the other 6. And possibly why UKIP went from nowhere to winning the EU elections in 2014 and the 3rd highest vote but no MPs (bigger than the LibDem and SNP combined who got 64 MPs) in the GE of 2015?

      When the EU gave the finger to Cameron we cried ‘Enough already’.

      I do not wish to be controlled by an expansionist foreign power and for clarity anything that isn’t British is by definition ‘foreign’ – cue racism chants

      • That was to Jas. Our pound has been too high for a year anyhow and on the decline for the past hundred years. it has hurt our manufacturing and or exports.

  8. TH we will never read or see your books or even care about them because they are written from the basement of the Kremlin in Russian.
    Sorry mate I do not read Russian, although you would obviously like us all too.
    The UK is not unique in having national debt or pensions liability. No one needs to panic, it is all relatively normal.
    There is certainly no need for a rushed series or I’ll thought out defence cuts, we have suffered from too many of those already.
    Germany is the only major Western nation without huge public debt and that is only because, sadly Trump is right, the Germans use the EU and joined the Euro to devalue their exports and drive the German economy onwards. However this is only successful at the expense of other EU nations that cannot compete against German export driven economy.
    I think at this time of uncertainty we should be doing the opposite and increasing the defence budget.
    Remove our nuclear deterrent and pensions from main defence budget, they should never have been allowed to be moved via Osbourne creative accounting onto the defence budget. The liability for armed forces pensions and strategic nuclear deterrent sits squarely with the country as a whole and thus should come direct from HMRC/ chancellery.

    • True. Deterrence I could see as part of the defense budget as that is where it is in the US and Russia. But how he managed to put pensions and benefits in there I will never understand. For example in the US military pensions and benefits not only have a separate budget but it is also administered by it’s own cabinet level department.

  9. Can I just stick my head above the water and say, actually, I think TH has been posting in a less inflammatory and more balanced manner recently. I didn’t like the way he was posting previously but credit where credit is due. Now time for me to be torpedoed and called a Ruski myself. Bracing….

    • I agree – TH is putting a valid (if unpalatable) view forward and he is not being as antagonistic as some on this site believe.

      We are all passionate and I suspect TH also wants what is best for our country.

      I personally have a problem with people getting more on benefits than on minimum wage (which is taxed/ benefits are not).

      But I am all for more money for the military – but first off I want to know where the £40bn pa spent p.a. (official government figures are between 36-48bn btw) actually goes.

      I suspect TH is venting at politicians more than us or the military.

  10. I have just seen in the press that the EU would like to have the ability to veto any trade deals we have with other countries post Brexit, for two years I think. Yet another back handed manoeuvre to try to prevent us leaving the club.

    I have always wondered who are national debt is owed too? I recognise a number of banks etc hold the interest, but why can’t the debt be negotiated to a lower payment or quashed, as wouldn’t it be in everyone’s interest to ensure the country remains solvent and can still provide public services? Just a thought…..

    • It can be quashed and is often renegotiated with new debt being taken on at lower rates that is then used to pay off the higher rate bonds. but this is like moving money between credit cards.

      If the UK quashed its debt -it would be counterproductive as no one would ever lend to us again on a low interest basis. We would essentially be Brazil and given our position in the financial services industry this would be catastrophic for the country.

      • So basically we are running our debt like a car PCP, never paying it off as we can always trade in the old model for a new one? Seems bonkers to me….

        • exactly and always hoping the next tranche of debt will cost us less than the last lot… whilst always adding to it.

          Thatcher and John major got our public finances into some sort of order, before Brown spent it all and then some…. since then we have been on the back foot I am afraid..

          • Unfortunately whilst putting our public finances in order, fighting the unions they privatised anything they could sell off for a quick buck and destroyed UK manufacturing. This has made the UK economy dependent on consumer spending and financial services. A legacy that is now coming home to roost and both Tory and Labour are equally guilty.

  11. All of this discussion revolves around one simple number for each project – the exchange rate that was used in the budget for that project.

    Until someone asks this Q no one knows what the delta is and how much is political spin.

    What I would suggest is reasonable is that its rare to hedge beyond three years and many of these programs are much longer, F-35 being the best example.

  12. Makes sense.

    A weaker £ vs the $ will make purchasing US equipment more expensive.

    Just as the much stronger £ previous to the June referendum meant the UK was buying US kit by the barrell-load?!?

    Besides, the £ is back within 7% of the pre-referendum exchange rate.
    So, they are late with their excuses.

    • It only makes sense to a point – the value of the £ is irrelevant if the actual asset we are buying is cheaper than anywhere else (ie: Apache, F35, P8). If you can’t buy it cheaper anywhere else (and you can’t) then the value of the $ is irrelevant.

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