Today’s report from the National Audit Office (NAO) finds that the Equipment Plan remains unaffordable for the fourth successive year, with the Ministry of Defence (MoD) estimating that equipment costs will be £7.3 billion higher than its budget between 2020 and 2030.
The MoD’s Equipment Plan sets out its intended investment in equipment over the next decade, and assesses whether it will be affordable.1 The 2020–2030 Equipment Plan (the Plan) shows that the MoD allocated £190 billion to equipment projects, 41% of its overall defence budget, which it needs to manage effectively to ensure the armed forces can secure and maintain the equipment they need to meet their military objectives.
In the Plan, the MoD estimates that costs will be £7.3 billion higher than the budget, although in a worst-case scenario, the funding shortfall may be as large as £17.4 billion. However, the NAO continues to have reservations about the Plan’s cost forecasts.
The MoD has presented the equipment budget on a different basis to previous years, which means its estimated funding shortfall for 2020–2030 is not directly comparable to previous years. The 2020–2030 Plan also excludes the full costs of replacing equipment that is becoming obsolete, such as the Navy’s mine hunting capability. The MoD has also started major procurement projects, including new submarines and combat aircraft, and is intending to develop new capabilities such as space capabilities, but has not included the full costs of these in the Plan.
The MoD continues to make over-optimistic and inconsistent judgements when forecasting costs. In the Plan, the MoD reduced its overall cost forecast by £25.1 billion to reflect adjustments for expected savings and its ability to deliver projects in line with original timetables. The MoD has made some improvements in its approach to estimating these savings, such as introducing a new process for estimating efficiency savings. However, it has not made enough progress in establishing a consistent and evidence-based approach to adjusting cost forecasts.
Affordability pressures have grown since 2015 and are increasingly restricting the ability of military commands to develop their capabilities.2 The funding shortfalls are most acute in the next five years, with an estimated deficit of £8.3 billion, although this could be higher if the military commands do not achieve £8.4 billion of forecast savings in these five years. All of the military commands have funding shortfalls in their 10-year equipment programmes, with the Royal Navy reporting the largest shortfall of £4.3 billion (12% of overall costs). The MoD has no contingency for 2020-21, restricting the military commands’ ability to act on any unexpected demands or cost increases. As a result, the commands have again responded to funding pressures by stopping projects or deferring expenditure into later years.
The MoD produced the Plan prior to November 2020, when the government announced an additional £16.5 billion to support the development of military capabilities. This funding is intended to allow the MoD to modernise and invest in new technologies, including its cyber and space capabilities. It presents the MoD with an opportunity to develop a more affordable programme to develop the military capabilities that it needs. As it decides how to allocate this funding, the MoD will need to ensure that long-term decisions on equipment projects are based on a realistic assessment of costs.