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HCDC Report – 2% GDP Spending Target Only Made Possible By Creative Accounting By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

modThe conclusion by the House of Commons Defence Select Committee (HCDC) in its latest report – Shifting the Goalposts? Defence Expenditure and the 2% Pledge – that the Government’s promise to spend a minimum 2% of GDP on defence has only been made possible by creative accounting, meaning transferring various aspects of other government spending onto the defence budget to make the numbers stack up, will have surprised very few of those that read this well written review today.

Spending 2% of our GDP on defence is a great pledge for the government to have made even though most of us who engage in defence know full well that in this uncertain and more challenging world we should really be talking about spending 3% to 3.5% of our national budget on defence. But, what the government may have promised in respect the 2% spending pledge it has made to NATO is meaningless if all that has occurred is creative accounting or what some of us used to call financial engineering.

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Defence expenditure as a percentage of GDP, 1955–2014

Throughout the HCDC inquiry into the 2% GDP defence spending issue the MOD has been very cagey in terms of the information it has provided. To this day it seems that we must remain in the dark as to what has and what has not been included in the underlying calculation of UK defence expenditure that has been submitted to NATO. Year on year comparisons are so easily confused by a lack of transparency on the part of the MOD. None of this comes as a surprise and having done its best to hide and confuse I rather doubt that the MOD or anyone else in Government will lose sleep over this particular report. More’s the pity.

Health (NHS) expenditure as a percentage of GDP, 1955–2014

ukmod2Background: UK defence expenditure has steadily decreased from an historic level of approximately 7% of GDP in 1955–56, to 3.80% in 1990–1991 at the end of the Cold War. From 1969 until 1988 (the year before the fall of the Berlin Wall) the UK spent between 4% and 5% of GDP on defence every year. This was substantially more than all other NATO Allies with the exception of the USA. The impact on defence spending as a result of the 2010 Strategic Defence and Security Review had resulted in a reduction of 8% in defence spending overall. This in turn led to a 20% reduction in the UK’s conventional military combat capability. In 2013, with UK GDP at £1.61 trillion and a defence budget of £37.1 billion, defence expenditure totalled 2.3% of GDP. However, by 2014 and when UK GDP totalled £1.7 trillion, the defence budget had fallen to £36.9 billion, a figure that represented just 2.17% of GDP overall. Subsequent to that given that there were still impacts of SDSR 2010 to come into play meant that for the first time the UK would likely fall below the NATO 2% GDP minimum?

Having led the case that each NATO member state should work toward spending a minimum of 2% of GDP on defence at the NATO summit that was held in Wales in September 2014 the UK government’s reluctance to come out in full support its own proposal for at least another years was both surprising and disappointing. Eventually it did but not before much work and effort had gone into creative accounting.

Welfare expenditure as a percentage of GDP, 1955–2014

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So how has the 2% GDP spending figure been made to stack up by HM Government and what has the HCDC been able to expose? According to one of the papers submitted or read by the HCDC, in this case a RUSI briefing paper, achieving a 2% GDP spending figure was made possible by a number of significant changes in the UK’s calculation of its defence budget for NATO reporting purposes.

On the basis of the counting rules previously used for its NATO returns, the RUSI paper suggested that the UK would have been on course to spend £36,820 million on defence in 2015/16, including £500 million on operations: equivalent to 1.97 per cent of GDP. Applying the new counting rules, by contrast the UK is projected to spend £39,019 million in 2015–16, equivalent to 2.08 per cent of GDP. In total, therefore, the UK has added around £2.2 billion to its NATO count.

Education expenditure as a percentage of GDP, 1955–2014

ukmod4The HCDC report includes evidence given by Professor Julian Lindley French who suggested that “the UK has suddenly discovered the 2004 NATO definition that refers to other forces”. This he said “refers specifically to other forces that are “structured, equipped and trained to support defence forces and which are realistically deployable”. I would suggest that the Government has creatively applied those criteria of other forces, and in doing so has added some 14% or £5.7 billion to the defence budget”. That includes intelligence assets, military pensions, the cost of overseas stabilisation missions, UN peacekeeping missions and, it would appear, pay-outs to retired civil servants and other MOD income expenditure. Professor French concluded that “this was being creative with the books” and he went on to say that “if one includes pre-2010 accounting methods, [defence expenditure] is between 1.5% and 1.6% by 2020. If we take this new figure, I would suggest it is around 1.8% by 2020, which means we are indeed seeing a shifting of the goalposts”.

Having sat through various hearings during the 2% inquiry myself it is good to see that the report – Shifting the Goalposts? Defence expenditure and the 2% pledge – has included some very interesting historic statistics. Some of these you will hopefully find, assuming I have managed to copy and paste correctly, towards the end of the commentary or within the link:  http://www.publications.parliament.uk/pa/cm201516/cmselect/cmdfence/494/49402.htm

The Government will, as I have implied above, have a rather different take on what the HCDC has published this morning and it will probably claim, quite correctly I suspect, that whatever it has added on to the defence budget to get the numbers to add up be they the addition of pensions, UN peacekeeping missions, GCHQ, Cyber, international development spending and other types of spending is allowable under NATO rules that govern what is and is not to be classified as defence and what can and cannot be included in the 2% commitment. I doubt that whatever the Government chooses to say will find favour with those who know all too well that 2% GDP has been yet another fudge.

But the rest of us know that it is a ‘sham’ to claim that we really are spending or, intending to spend 2% of our GDP on real defence. Indeed, while we have all welcomed with open arms the announcement last year that the defence budget would be ring-fenced and that there would be a £500 million increase in the budget in each of the next five years we also know that most of this will be mopped up by the promise to increase spending on Cyber Security needs and also in respect of improving our ability to collect intelligence at GCHQ.

I am not criticising the need to do either of the points above but I do criticise the pretence that we have addressed all of the shortfalls faced by the MOD. For instance, while it is true that the Royal Air Force will get significant additional capability such as enhanced ISTAR capability in the form of a plan to eventually upgrade Sentry E3-D aircraft, the purchase of nine Boeing P-8 Poseidon Multi-mission maritime capability, acquire more F-35 Joint Strike Fighter aircraft through the life of the build programme plus an increase in the number of fast jet squadrons it is equally true to say that none of increased capability announced in SDSR 2015 begin to kick in before 2018/19. The same is true for the Royal Navy even though significant plans in relation to the two new aircraft carriers currently under final construction together with plans for eight new Type 26 Global Combat Ships and five Type 31 light frigates were incorporated into SDSR 2015along with plans to publish a national shipbuilding strategy in 2016.

My point is that whatever could be pushed back by SDSR 2015 has been. More to the point, look deep into SDSR 2015 and you will see that new capability is dependent on £11.5bn of savings being achieved over the five years covered by the review. This is the real sting in the tail and the jury remains out as to whether savings of this scale can be achieved.

(Note that UK Defence (250) – F-35 Lightning Moves Closer toward RAF Operational Service will follow next week)

CHW (London – 21st April 2016)

Howard Wheeldon FRAeS

hwheeldon@wheeldonstrategic.com

Tel: 07710-779785

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