"A crucial question for the Ministry of Defence
is whether it can use strategic financial management to stop living
beyond its means. The current Strategic Defence and Security
Review will provide an opportunity for the MOD to balance its books
in the short-term. The greater challenge will be to keep spending
plans affordable in the longer term. The Department is not at
present placing enough emphasis on financial management to be able
to do this."
Mr Amyas Morse, head of the National Audit
Office, 21 July 2010
The Ministry of Defence does not place
sufficient emphasis on financial management in its decision making,
according to a report released today by the National Audit
Office.
Annual financial plans at the MOD have been
over-committed. By the end of July 2009, the budget for the
Department was exceeded by its forecast for the rest of that year
by £700 million. When the assumptions underlying the plan for
2010-11 were reassessed, the forecast deficit grew from £185
million to over £500 million.
While not all of the factors that have led to
the Department’s plans being over-committed are of its own making
(defence cost inflation is higher than in the domestic economy and
the long-term and relatively inflexible nature of defence
projects), the Department is able to make choices in setting its
budgets and priorities and could use financial management more
effectively to address those factors which are within its
control.
The shortfalls in financial management have
significant consequences. The over-commitment in future spending
plans has led to additional savings being necessary. During
2009-10, the Department had to find additional savings of £800
million to bring its planned expenditure back into line with its
budgets. Finding these reductions mid-year is a time-consuming and
destabilising exercise. Many areas have to revisit or adjust their
plans leading to delays, material changes to project specifications
and costly renegotiation of contracts with industry. Delaying
projects also leads to significant increases in the project
cost.
In May 2010, the Government announced a
Strategic Defence and Security Review. This Review will provide an
opportunity for the Department to rebalance its future spending
plans in the short term. Over the longer term, however, the
challenge for the MOD will be to ensure that these plans remain in
balance.
The finance function at the MOD does not have
as central role in strategic planning as it should have. Financial
management does not have a high enough priority to counter the
Department’s tendency to make over-commitments in its strategic
planning. The Department has work underway that should make its
financial planning more effective, but it also needs to demonstrate
that it has the will to use the tools it already possesses.
Publication details:
HC: 290, 2010-2011
ISBN: 9780102965377