a day ago
The £13 bn hole in the government's 2.6% defence target
The Chancellor's and the Treasury's assertion, in its latest Spending Review, that by 2027 defence spending will 'reach 2.6% of GDP' is not all it seems, to the tune of about £13 billion.
Here's why.
The published forecasts for defence spending in the financial years 2026/7 and 2027/8, of £65.5 billion and £71 billion respectively in cash terms, are 2.1% and 2.2% of the OBR's forecast of 'current prices' GDP in those years.
This is a long way short of the pledged 2.6%. The gap in cash terms is £13 billion - which is NOT a rounding error.
I should start by saying that 24 hours ago I asked Treasury officials to explain the gap. It can't be hard for them to do so. They've gone away to think about it.
So here are a few of my thoughts about what is going on.
Some of you may remember that the government is including 'Nato qualifying' spending on intelligence in its calculation of that 2.6% target.
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But defence-related intelligence cannot possibly be more than a fifth of all UK spending on Mi6, Mi5 and GCHQ, because Nato is very clear that the only intelligence spending that counts has to be directly related to military operations.
I am going to be generous and assume spending on military intelligence that is part of the so-called Single Intelligence Account and outside of the Ministry of Defence's (MoD) budget is just over a billion pounds.
Ben Wallace, the former defence secretary, tells me this is absurdly high. But I am trying to give the Treasury the benefit of the doubt.
Even with my generosity there is a £12 billion gap. And by the way, even if every single penny of intelligence spending was attributed to defence, there would be a £7 billion gap!
One Treasury official said another £1.6 billion is probably the £1.6 billion annual cash cost of army pensions.
I'll lop that off the £13 billion. Which leaves only £10 billion to find.
Wallace told me that when Osborne was chancellor, he insisted that in submissions of the UK's defence spending to Nato the MoD had to include the VAT it pays on procurement.
As Wallace says this is double counting, because the VAT is paid to the Treasury. When defence secretary, he was so infuriated that one year he refused to submit numbers to Nato.
So perhaps the whole of the £10 billion gap is VAT.
And maybe the reason the Treasury isn't getting back to me to confirm or deny is that it knows neither Nato or President Trump would be impressed that a huge proportion of our claimed defence spending may be around £10 billion in tax payments to... the British government.
Anyway, now that I've put these numbers in the public domain, I await with interest clarification from the Treasury of what's going on here.
None of what I've just said takes away from the published fact that defence spending is rising 3.8% faster than inflation for the next three years.
That is a huge amount of resource being transferred to defence.
But if when you read that the UK is set to spend 2.6% of GDP on defence, you thought all of that significant expenditure was on the armed forces, munitions, military satellites, nukes, planes and boats - as I did - you need to think again.
