MoD facing £17bn equipment plan shortfall

The National Audit Office (NAO) has reported that the Ministry of Defence’s (MOD) Equipment Plan for 2023 to 2033 is significantly underfunded, facing the largest budget deficit since its inception in 2012.

The shortfall of £16.9 billion was highlighted in the report titled ‘The Equipment Plan 2023–2033’.

As of March this year, the forecasted costs stood at a staggering £305.5 billion, surpassing the budget of £288.6 billion. This marks a stark contrast to last year’s Plan, which had forecast costs £2.6 billion below the available budget. The report pinpoints the root of unaffordability to a 27% increase in forecast costs, amounting to £65.7 billion, which significantly overshadows the 19% budget increase of £46.3 billion. Nuclear and naval programmes are the primary drivers of this increase, with costs soaring by £54.6 billion.

A significant contributor to the financial strain is the MOD’s prioritisation of delivering the replacement nuclear deterrent on schedule, leading to a 62% cost hike at the Defence Nuclear Organisation (DNO) by £38.2 billion. Similarly, the Navy’s forecast costs have escalated by £16.4 billion, a 41% jump from the previous Plan. The NAO identified inflation as a key factor in the Plan’s increased costs. However, the MOD has not received additional funding to counteract these inflationary pressures. Consequently, the Top Level Budgets (TLBs) must absorb the impact within their existing budgets. Inflation is expected to contribute £10.9 billion to the Plan’s cost increases.

Despite these challenges, the MOD is not planning immediate program cancellations. Instead, it aims to use an additional £1.95 billion provided in the 2023 Spring Budget to mitigate its funding shortfall for 2023-24 and 2024-25. Nevertheless, the MOD acknowledges that the Plan’s funding gap could range from £7.6 billion to £29.8 billion, depending on the materialisation of risks or opportunities. The report also highlights a discrepancy in how the TLBs prepare their forecasts, leading to an underestimation of the full funding gap between government objectives and the budget available. This inconsistency fails to reflect all cost pressures for developing new and supporting existing capabilities outlined in the 2021 Integrated Review and the Defence Command Papers.

Gareth Davies, the head of the NAO, expressed grave concerns over the unaffordability of the Equipment Plan in the report, which can be found here.

“The MOD acknowledges that its Equipment Plan for 2023–2033 is unaffordable, with forecast costs exceeding its current budget by almost £17 billion. This is a marked deterioration in the financial position since the previous Plan. Deferring choices on spending priorities until after the Spending Review, while understandable given the government’s ambitions expressed in the updated Integrated Review, risks poor value for money if programmes continue which are later cancelled, scaled down or deferred because they are unaffordable.

The MOD should consider how future Plans can achieve their core purpose: providing a reliable assessment of the affordability of its equipment programme and demonstrating to Parliament how it will manage its funding to deliver equipment projects.”

Brief summary of projects either not Included or partly included in the Equipment Plan

The National Audit Office report on the Ministry of Defence’s Equipment Plan 2023-2033 reveals several critical capability requirements that are partly or fully excluded from this year’s plan. These exclusions, despite being integral to the UK’s defence strategy, have no funding allocated in the equipment plan.

Programmes Not Included in the Plan:

1. Land Environment Capability Assessment Register (British Army):

• Unfunded Gaps: Significant gaps in lethality, air defence, C4I systems, logistics, CBRN, and mobility.
• Internal Balancing: The Army is conducting an internal exercise to modernise forces within existing funding.

2. Warrior Armoured Vehicle and Challenger 2 Main Battle Tank (British Army):

• Costing Uncertainty: Extensions for Warrior and Challenger 2 are still being costed, potentially leading to unfunded pressures.

3. Land Precision Strike (Strategic Programmes Directorate):

• Requirement: A need for a ground-launched precision guided weapon with at least 80km range.
• Funding Status: Programmed for the end of the decade, but no financial commitment yet.

4. SPEAR Cap 3 Electronic Warfare Air-to-Ground Missile (Strategic Programmes Directorate):

• Programme Status: Initial low-cost capability demonstrator under negotiation; full programme confirmation pending by the RAF.

5. Meteor Air-to-Air Missile (Strategic Programmes Directorate):

• Mid-Life Upgrade: Funding of up to £2 billion required for mid-life upgrade, currently not included.

6. Test and Evaluation Contracts (Strategic Programmes Directorate):

• Funding Shortfall: Insufficient funding to replace two contracts ending in 2028; development and procurement funding gap exists.

Partly Funded Programmes Included in the Equipment Plan

1. A400M Transport Aircraft Additional Purchases (Royal Air Force):

• Funding Status: Some funding held centrally; sufficient but does not align with later years’ spending needs.

2. F35-B Combat Aircraft Third Front-Line Squadron (Royal Air Force):

• Capital Budget Shortfall: Increases by £0.1 billion between 2023-24 and 2026-27.
• Operational Funding Gap: Lacks £0.4 billion needed to operate the squadron.

3. New Entries into the Shipbuilding Pipeline (Royal Navy):

• Projects Included: Multi-Role Ocean Surveillance ships, Type 32 Frigates, Multi-Role Support Ships, Type 83 destroyers, Future Air Dominance System.
• Financial Shortfall: Costs are £5.9 billion higher than current budgets.

4. In-Service Extension of RFA Argus (Royal Navy):

• Implementation: Extension of the primary casualty receiving ship is underway.
• Budget Issue: No additional budget was received for this extension.

5. Mine Hunting Capability (Royal Navy):

• Plan Inclusion: Second phase included in the Plan.
• Funding Shortfall: No additional budget for this phase; additional funds sought for Hunt Class vessels until new capability is operational.

6. Future Commando (Royal Navy):

• Modernisation Funding: £0.7 billion required for Royal Marines modernisation to enable operations from the sea in high-threat environments.
• Budget Exclusion: This funding has not been included in the Plan.

7. Directed Energy Weapons (Strategic Programmes Directorate):

• Status: Novel capability with assessment phase funding.
• Review Pending: MOD to review at the end of the assessment phase; may replace or supplement other capabilities.