Thursday, July 9, 2015

SDSR 2015 - About that 2%




SDSR 2015 – Issues, analysis and recommendations going towards the review

Budget
About that 2%

Army 

Royal Air Force 
Royal Navy 



It was a surprise when the Chancellor committed to keeping defence spending at 2% of GDP for the lenght of this parliament. It should not have been a surprise, since the promise to stick to this NATO target is ancient, made to close allies and reaffirmed very loudly at the NATO summit in Cardiff last year. But it has been. For a long time, the UK has appeared to be on a steep slide to decline which would bring the defence budget well under the 2% mark, also due to the (very welcome) growth of GDP.
Now we have the relief of a 2% promise. It is obvious that it beats the alternative, which was falling even lower, but there is no reason for particular cheering: even before we learn how genuine the committment is, we must remember that all we have obtained is the setting (at least for now) of a limit to the decline which goes on and on from decades.
In percentual terms, defence spending will effectively fall further, compared to this year (where it amounted to some 2.1% of GDP) and will have fallen rather dramatically from the 2.4% it was in 2010.

The importance ot the 2% figure is merely in being a "rock-bottom" (as long as it holds) under which spending will not go. It is a limit put to decline, nothing more.

Moreover, we will have to keep our eyes very, very widely open to catch the devil in the detail. Financial tricks have a part in making up that 2% figure: expenditure which used not to be counted against the GDP target for defence has already been included, and more gimmicks might well be on the way. That's part of why it is wise to keep expectations down, and be realistic in how much we cheer.
It is really a case of "well, it could have been SO much worse", more than anything else.
Suspect has immediately flared about the new £1.5bn Joint Security Fund for investment in military and intelligence agencies, but
Mark Urban reports that it does not seem it will be part of the defence budget, thankfully. Still, the financial aspect of the 2% figure will have to be watched closely.
Since the 2% announcement was made, we have had official confirmations that new voices of expenditure have been added to the “Defence” figure. These additions are approved by NATO and technically legit, but in the UK they were counted separately from defence proper until last year, and their inclusion inevitably warps the numbers. Specifically: 


As with other NATO allies, from time to time we update our approach to ensure we are categorising defence spending fully in accordance with NATO guidelines, seeking to capture all spending contributing to delivering the defence of the United Kingdom. Our 2011-12 NATO return was £36.6 billion. This included the Ministry of Defence budget, the cost of operations, and the Armed Forces Pension Scheme but did not reflect all UK defence spending. Our 2015-16 NATO return of £39 billion also included Ministry of Defence-generated income which directly funds defence activity, elements of the Government's cyber security spending, parts of the Conflict, Stability and Security Fund relating to peacekeeping, war pensions and pension payments to retired MOD civil servants.


Lets be clear once more: to even achieve 2% without gimmicks, it would still mean decline in percentual terms. We are forced to take the 2% as a good news only because the alternative was even worse, and by far. Further reducing the beneficial effect of the “2%” is the inclusion of voices of expenditure previously counted separately. The Treasury will include absolutely every penny it can, according to NATO’s own definition of “defence spending”.
In summary, the pressure on the forces' budget is not going away, but only being somewhat contained, and expecting miracles will only result in disappointment and tears.


Another factor to guard against is the request for more "efficiency savings". There are margins to achieve real efficiency in MOD operations, and a few changes, reductions and adjustments in this sense are actually pretty obvious. But they are unlikely to generate the kind of savings the Chancellor is probably seeking, so that "efficiency" might well include more stealth cuts. Training, logistics and personnel costs are obvious areas where underwater measures can happen without it being too evident to the general public. But stealth cuts in these areas could be very damaging, no matter how well hidden they might be.
Even equipment programmes are at risk. Despite it being an area which has received particular assurances, the simple fact remains that we don't know what the famous equipment programme is about. We have rough indications about the amount of money assigned to macro-areas (aircraft, helicopters, ships, submarines, armored vehicles) but little to no detail about the programmes that are going to be funded, and less than ever any indication about how many vehicles or aircraft or other bits of kit will be purchased.

Warrior CSP numbers are not specified. We only have hints and guesses: the recent order for 515 CTA 40mm guns is split 245 - 245 - 25, in which 245 guns go to SCOUT SV, 245 to Warrior CSP and 25 to test, trials and development. 245 is thus to be assumed as the number of Warrior IFVs being upgraded. In addition, some 135 Warrior in artillery observation, recovery and repair variants are expected.
The number of turreted IFVs (245) appears absolutely insufficient for the 6 planned armored infantry battalions.
ABSV, the much needed programme for a "new" (actually likely to be just more Warriors adapted in new support variants) vehicle to use as replacement for the ancient FV432 series, is struggling to get off the ground and is described as an "aspiration" of the Army. This is very depressing, and a step back from earlier hopes to achieve initial gate this year.
Challenger 2 LEP, also seems to have been pushed to the right at least one year, even after having been dumbed down to a very modest "indispensable only" electronics modernization.
Apache CSP, the target is know as being 50 helicopters, but there is no written, public commitment to that number, leaving risks on the way.
F-35B final purchased number: it is unlikely that the SDSR will provide the final number. Main Gate 5 (bulk purchase) is planned for 2017, and the government might well wait until then before providing any indication of what, if anything, will come after the initial 48. The expectation is for an eventual purchase of between 70 and 96 (the latter being a programmatic number which surfaced briefly at the time of the switch to F-35C). But, again, it is little more than a guessed aspiration.
And so on. Every single programme which hasn't a contract signed yet, including Type 26, is completely wrapped up in uncertainty. We won't really know, in many cases, if there are cuts, because we are not being told what the requirement and planning numbers are.
There is ample margin to mess up the numbers and apply stealth cuts.

The one good bit of news in the budget announcement is a commitment to increase defence spending in real terms, year on year, by a 0.5% margin above inflation (this being around 1%).
Originally, the MOD was asked to plan for Future Force 2020 on the basis of a flat in real terms (translated, adjusted for that 1% annual inflation, and nothing more) budget, with a 1% annual boost to equipment spending only.
A defence budget-wide 0.5% boost above inflation should be helpful.
Do not expect miracles, though, as defence inflation is estimated at above 2%, with how costs for major programmes evolve year on year.
It is a budget for survival, not a budget for reconstruction.

In my opinion, considering the many caveats and risks still on the way, what we can hope for is a "steady as she goes" SDSR, with no dramatic cuts, but with some adjustments still. The government will be able to stick to its promise of maintaining current manpower figures (both regular and reserve) and Future Force 2020 is likely to be confirmed in more or less the same shape.
A few good news might arrive: after yesterday's announcement, we can be a little more hopeful regarding a purchase of P-8 Poseidon aircraft for maritime patrol duties.
Even then, though, the much needed entry into service of Poseidon will come with the loss of Sentinel and Shadow R1, which are on a time-limited life out to 2018. If we are lucky, by around 2019 they will be going out... but the Poseidon will be coming in. Hopefully. That would limit / offset the loss of overland ISTAR, as well as reintroduce much needed at-sea ISTAR.

36 comments:

  1. Little pessimistic. But we have all gotten used to the endless “doing more with less” diatribe that seems to constantly get deployed at this point. 
    I’m a tiny ( just tiny ) bit more hopeful.
    With projected GDP increases over the next 10 years looking very good indeed, I think we should be looking at approval of pretty much all the equipment projects we know about. It will be interesting to see if they immediately commit to 13 Type 26, but I think they will.
    I’m hoping we made get all the River class to, I suspect we might see them staying on in some capacity.
    To do this however we are going to be looking at a modest increase to RN manpower ( we know they are advertising right now to try to get back some who left ).
    And I suspect the “ARMY RESERVES” issue will need to be addressed, and I think there will be a commitment to shift some measly number back from reserve to regular over the next 10 years.
    Yanks are trying to organise a bulk buy of F35, I think we might notionally order another batch for 5 years time, just another call off on our planned order anyway.
    GDP should more than pay for all this.
    It will make great headlines. And I mostly predict a lot of headlines and flag waving, and “Britain leads Europe” banners etc etc , in the papers. Yawn.
    Politically, worst case sinario if GDP falls, we can have a defence crisis meeting and all bets are off.
    Beno

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  2. The government has not just committed to 2%, it has committed to NATOs definition of 2% (see the published policy paper on the recent budget). This means there is a limit to the "financial tricks" they can pull.

    In my opinion, this is why we are getting the 0.5% real terms -above inflation- increase in the first place, rather than the original flat in real terms increase. Because even after including every bit of spending NATO defines as defence spending to make 2%, we were still short out to 2020-21.

    0.5% is actually a good deal of money too.

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  3. Daniele MandelliJuly 9, 2015 at 2:45 PM

    Ciao Gabriele

    Good quick fire article so soon after the news.

    Is there a chance, given the security situation in the Middle East and Africa that Sentinel will be retained along with any P8 order? Does the P8 even have the sort of SLAR that Sentinel has for ground surveillance work?

    Also, does the P8 have SIGINT capabilities? As, although little is publicly released, that seems to be the role of the Shadow R1, particularly in support of DSF.

    The ideal for me is retention of all our ISTAR assets, especially Sentinel, which is a real feather in the RAF's cap and a capability few possess.

    Any P8 or P1 order should be for MPA work.

    It also seems that elements of the Security Service, Secret Intelligence Service and GCHQ's work will also now be included in the definition of the 2%, which must be carefully watched. There is certainly some overlap, especially in the area of GCHQ with MoD and military personnel, which may be acceptable as the US NSA is part manned by the US military and is included in their defence figures.

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    1. It would be of course better to keep Sentinel in addition to Poseidon, but it wouldn't be a bad trade off, particularly if the MOD funded the addition of the side-scan, surface search radar that the P-8 can mount in a canoe fairing under the fuselage. The US Navy is introducing into service a new, advanced AESA radar which can be fitted in this position, the AAS. If they accepted to export this to the UK, Sentinel R1 would be very well replaced.

      P-8 has some SIGINT capability, yes. Whether it can do exactly what Shadow R1 has been doing is not something i can know. But it is, as always, a case of settling for the less damaging solution. Given the choice between Sentinel + Shadow and Poseidon, i would still go Poseidon.

      Interestingly, a recent presentation about the RAF of 2020, says that "MPA capability has been lost" and that Sentinel R1 and Shadow R1 will go in 2018. But, among the photos of the platforms that will be there in 2020, there is the P-8. No indication given other than the photo, unfortunately. But it is another sign of what is the direction of travel, i'm guessing. I tried asking, when seeing that photo... but i was given no reply. I guess no one is yet comfortable with saying it out loud.

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    2. Daniele MandelliJuly 9, 2015 at 9:47 PM

      Thank you. I did not know that detail on the P8. Maybe then the P8 replaces Sentinel with the extra capabilities that can be added to it and Shadow also stays, that would be a positive for me too.

      I feel that much of the 2% will be taken up by shifting money from other areas, which is a downer, but I am staying hopeful that the 0.5% a year above inflation will really help us ward off any more major cuts and get some small additions.

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    3. I talked about it here, a while ago: http://ukarmedforcescommentary.blogspot.it/2013/01/the-p8-poseidon-and-uk.html

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    4. Any chance the P8 would be a Fleet Air Arm asset?

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  4. @Daniele Mandelli,

    Yes, any spending that falls under the NATO definition of defence spending will be included in the 2% figure. What needs watching is if HM Government tries to pull a fast one and bury spending in the 2% that does not meet NATOs criteria.

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  5. Gaby,

    About that 2%. I am fascinated by this figure, as already some pundits and commentators seem to be saying that it is an appreciable sum of money.

    You sensibly warn us about the devil being in the detail and to watch out for financial gimmicks. You add that we should not expect miracles and say quite rightly that it is a budget for survival, not a budget for reconstruction.

    The question I would like to ask , though, is whether the 2% is that large an amount of money. The “Telegraph” stated today that the defence budget would “rise by 0.5% a year until 2020-2021.” The MOD would “receive an extra £1 billion a year by 2020.”

    Now this is where I would like you, if possible, to check my figures. (I am notorious for getting the simplest sums wrong). If we have a defence budget of approximately £3.7 billion a year, then 0.5% for the first year of the increase would be £185 million pounds, would it not? What could that retain in terms of manpower or purchase in terms of new kit? It might enable us to retain four of five battalions of regular solders for a year or perhaps buy 80 or 90 new FRES UV vehicles. Now, I realize that 0.5% increase will continue year by year until 2020 but isn’t it, in all reality, a useful rather than a considerable or substantial amount?

    You will probably consider me ungrateful. I am certainly not that ! The announcement was such a pleasant change from what seemed like an endless and depressing series of cuts, I was and still am rather pleased. However, will such an amount really achieve that much? (compared to what we need, I mean)? I suppose, given the size of our deficit and debt, we could not really expect much more.

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    1. Especially if GDP continues to grow, the amount needed to stay at 2% might include a rather sizeable boost, compared to the declining spending which was at one point becoming apparent. But i caution everyone against expecting miracles. I'm not really sure what to expect, as so much has yet to be seen, but even in the best case i exclude dramatic changes. On the other hand, there are as we know a number of relatively low cost enhancements which might become affordable, such as perhaps keeping the three new OPVs in addition to the existing ones. That would be nice.

      But as i said, defence normally has a very high yearly inflation factor, higher than the 1% nation-wide inflation figure. This is of course going to be one of those factors that bite away at any "increase", and make it a case of going ahead with what there is, more than dreaming of additional stuff. Any improvement that it will be possible to fund, of course, is more than welcome.

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    2. Its not just a 0.5% increase, its a real terms increase above inflation! Meaning the defence budget will expand at the rate of inflation and then a 0.5% increase on top of that.

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    3. The nationwide average inflation of around 1%. Plus 0.5%, it is still not even enough to fully counter defence inflation which is historically at 2% or more.

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    4. It might not cover defence inflation, but as you said the 2% figure is the historical one. Do you know what it has been in the last few years? Historically nation inflation was also around 2% a year (or higher). So not sure a historical figure helps that much.

      What would be interesting is if the 1% public sector pay freeze covers the military as well. From my understanding, from 2010 to 2013 it did, but then when the last freeze was extended in 2013, the military had some exemptions. With a 2013 basic pay increase of 1.45%. Either way, it is likely that the pay increases will be kept bellow 2% and most likely below 1.5%. So that will limit the increase in the personnel budget, which makes up over 25% of the MOD budget. Of course any limit on pay increases can/will make it harder to recruit and keep skilled people.

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  6. Why the assumption of 48 F-35's? I do not think there is any commitment to that number although I could be wrong. I think all they have said is that numbers would be set during the review.

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    1. While the 48 are not formally on order, it is the number which has been given since the SDSR 2010 in connection to the naming of 617 and 809 as squadrons on F-35B. Philip Hammond said there was a committment for a first 48 for carrier strike back in 2012. And in fact, you can't grow two decent squadrons plus OCU and OEU with much less than 48 aircraft.

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    2. Before the election, the Tories backed off even saying 48. Referred to the review for numbers.

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  7. Would like to know what the NATO definition is regarding the 2% compared to what our military budget includes.

    Remember the Govt. rolled the costs of the nuclear deterrent into the military budget but only UK and France have this capability. Effectively it was a significant cut to our regular military spending.

    On the positive side this commitment is to 2% of GDP so with a growing economy this is good news. What happens though when there is an economic downturn will the budget then be slashed in one year?

    Bit silly really just like the 0.7% of GDP committed to Foreign Aid. More so since there is no way the Foreign Aid budget can be spent effectively year on year.

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  8. Greece spends more than the UK in terms of GDP but can't deliver the same fire power the UK can.

    I doubt the UK in 1985 with 5% on defence spending could match a Soviet Force on a one-to-one basis.

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    1. Because 2.2% of a small economy (I.e Grecce) is not as much as 2% of a larger economy (I.e Britain).

      In 1985, the UK economy was smaller than the Soviet Union - who at the time was spending 15%+ of their GDP on defence!!!

      So yes, the Soviets with a far larger economy and spending 15%+ of their GDP on defence were obviously going to be far more powerful than the UK with a smaller economy and only spending 5% of GDP on defence.

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    2. We should also remember that money is not the same in every country. The cost of personnel can vary in pretty dramatic way from country to country, and the value of money itself is not the same. The same amount of money can buy more or less stuff depending on the country. All reasons why it would be better not to depend from arbitrary and purely financial indicators: they do not automatically equate to capability.

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  9. I'd rather see the government commit to a level of capability than this arbitrary 2% figure, but it's better than nothing.

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  10. Nosaj has made an interesting statement but I’ll let you comment on that one, Gaby.

    My question is whether certain arrangements for the equipment budget, which are now quite long-standing, will be affected by the announcement from the Chancellor about increased defence spending (i.e. by the announcement that the that the defence budget would “rise by 0.5% a year until 2020-2021and that the MOD would receive an extra £1 billion a year by 2020.)

    I refer to the arrangements of having unallocated headroom of £8.4 billion and a contingency provision of £4.7 billion. Presumably these arrangements will still stand and those funds will not be raided to contribute to the appearance of increased defence spending. After all, it was foresight and prudent housekeeping by Philip Hammond and others that allowed this money to be set aside to be used flexibly on equipment when required. We are not going to see a cynical raiding of those funds, are we?

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    1. There will be (and in part there already is) some messing around with the Equipment Programme, mainly with the shifting of equipment support costs from one account to the other. The totals don't change (more or less), but less money is availble to buy new stuff. As i said, the delay to ABSV and Chellenger 2 LEP is a pretty clear indication of murky games. We'll see how it actually works out, but as i've written in the article, the Equipment Programme (unlike the french Military Planning Law, which i absolutely adore for how transparent and clear it is most of the time) does not detail the what, the when, the how many. Hard to keep track of things, in this way.

      And yes, ideally we would all prefer to see a committment based on capability, instead of a financial target, especially if the latter is met by means of gimmicks, murkiness and trickery. But this is what we get, and i guess we have to be glad we did not get the even worse alternative.

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  11. Daniele MandelliJuly 13, 2015 at 3:01 PM

    The PM talking of expanding the UKSF is rich considering they were about to cut them a few years back. Also, having cut the army to 82,000 they have seriously reduced the pool from which suitable men may be found.

    I hope this talk of extra drones, spy planes and SF means they see the value of the Sentinel and Shadow, and keep these assets with the Reapers and the future MPA when that arrives. Don't know how he wants drones launched for the QE carriers though?

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  12. The Warrior figures do seem to still be very confusing. Here's my best guess - what do you think?

    I calculate the absolute minimum number of IFVs for the Reaction Force as 14 per Rifle Company x 3 = 42 per Armoured Infantry Battalion x 6 = 252 in total. So, I guess 7 of the test and trial guns will have to be fitted at some point!

    If the whole Warrior CSP total is now 380 that leaves 128 for Combat Repair, Recovery and Artillery Observation. But the crucial thing is these aren't part of ABSV they're still being dealt with as part of CSP.

    ABSV is then a separate total (could theoretically be up to 400 as that's how many Warriors there are unaccounted for) as an APC, anti-tank platform and ambulance. But heaven only knows when this programme is going to be defined!

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    1. That is what ABSV should be: mortar carrier, APC, ideally ATGW vehicle, ambulance etcetera. The "support" variants covered by WCSP are only the existing Recovery, Repair and Artillery Observation variant. The latter will need a second upgrade at some point, to be useful in any way, since the WCSP, unless things change, does not cover the mission system specific to the artillery and air support direction role. The Royal Artillery has been trying for years to firm up a new mission system for the Warrior, which will need to be funded and added in.

      42 Warrior IFVs per battalion is highly conservative. The Anti-Tank platoon would have no vehicles, nor would the Pioneer Platoon, and the few other Warriors in the Support Company would have to vanish as well.
      Plus there is no training margin (aka, vehicles to assign permanently to BATUS) and no reserve.

      They are just not enough for 6 battalions, end of the story. With the number given now, there will never be a realistic capability to put in the field more than 4, 5 battalions at the very, very most, come whatever may come.

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    2. Yes I see what you mean.

      On a separate subject has the Army allocated a particular vehicle for the Pioneer Platoons to use?

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    3. Have no idea, sincerely. In Light Role, they might just have access to Land Rovers or something. In Protected Mobility, perhaps Foxhounds.

      I know Sniper Platoons have gotten quadbikes to play with, but i'm not sure what arrangements have been made for Pioneers.

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    4. Hi Gabriele,
      Thank you for another very good article.
      How Many warriors are deployed on the BATUS training area?
      Never did BATUS, I assume enough for a complete battle group to train, therefore enough warriors for a battalion?
      If so, that would only leave enough warriors in the UK and available for deployment for 4 battalions?
      I would like to know the numbers if that's correct.
      Thanks
      Phil

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    5. The last time i saw a list, it said BATUS had:

      - 32 to 40 Challenger 2
      - 10 AS90
      - 10 Scimitar
      - 18 Spartan
      - 70 FV432 in the various variants
      - 2 Trojan
      - 2 Titan
      - 3 Terrier
      - up to 61 Warriors, all variants

      Plus Land Rovers and trucks, of course. Numbers are not fixed, and the permanently assigned fleet might have shrunk, but still.

      A battalion of armoured infantry tipically has around 50 Warriors with guns, plus Repair and Recovery variants. Warrior observation posts are found in the AS90 batteries.

      That's why i say that 245 just won't do.

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    6. Thanks Gabriele,
      I agree. but what are they going to do?
      Do you think they are going to reduce the number of warriors per battalion, or the number of warrior battalions?
      Regards
      Phil

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    7. Possibly they will use more Bulldogs, since the battalions which used to be mounted on them are now on Mastiff. For the rest, it'll be a matter of Whole Fleet Management, i'd guess. Hopefully at some point there will be ABSV better covering things such as the anti-tank platoon.

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  13. Daniele MandelliJuly 14, 2015 at 4:49 PM

    Latest reports I read is that the Single Intelligence Account will not now be used as part of the 2% as the Chancellor wanted, as NATO define this as needing to be "Military Intelligence" And the Defence Intelligence Staffs are already part of MoD. This hopefully means Osborne needs to find another few billion from behind the sofa.
    Which considering how much we are pouring away on overseas aid and the EU should not be a problem.

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  14. Very good report and not much that I can disagree with. 3 Squadrons of Tornado GR4 until 2016/17 is a done deal with two remaining through to 2018/19 OSD. However, you make little mention of Typhoon Tranche 2 or 3 (107 aircraft when all delivered to the RAF by 2018/19) in this piece or of the expected number of fast jet squadrons which will surely move up to nine and maybe higher still? Do you expect the 53 Tranche 1 aircraft to be extended?

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    1. Follow the link to the "Fast Jets and Squadrons number" and you'll find the whole article where i talk of it in detail. I'm not sure we can be too optimistic on the number of fast jet squadrons, but hopefully either Tranche 1 will be kept for some more time or, better still, the Tornado OSD will be pushed back into the 2020s, where it used to be.

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