Context of the Defense Investment Plan
The government's new Defense Investment Plan (DIP) allocates an additional £15 billion to military spending over the next four years. Prime Minister Sir Keir Starmer has characterized this as a significant shift in policy. However, questions have emerged regarding the funding mechanism for this increased expenditure, particularly after the Treasury indicated that identified departmental savings would not fully cover the planned defense budget rise.
Is There a £5 Billion Funding Gap?
Initial reports have highlighted a potential '£5 billion defense black hole.' However, a closer examination of the figures by BBC Verify suggests a different perspective. The Treasury's data indicates that defense spending is set to increase by an average of £3.75 billion annually over the next four years, compared to previous plans. Of this annual increase, approximately £1.2 billion remains unfunded and is expected to be addressed in the upcoming Budget.
Public finance experts recommend focusing on annual shortfalls rather than cumulative figures spanning multiple years, as the latter can often appear exaggerated. Therefore, the more precise figure for the funding gap is approximately £1.2 billion per year.
Significance of the £1.2 Billion Figure
While £1.2 billion represents a substantial sum, its impact needs to be contextualized. Compared to the projected total Whitehall departmental spending of £678 billion in 2026/27, this figure constitutes a small fraction, roughly 0.17%. Similarly, it is an even smaller percentage (0.1%) of the forecasted total tax revenues of £1,170 billion for the same year.
However, when measured against the Chancellor's fiscal headroom – the leeway against balancing day-to-day spending with tax revenues – the £1.2 billion takes on more significance. The 2026 Spring Statement provided around £24 billion in headroom, meaning the unfunded defense increase would account for approximately 5% of that buffer.
Ruth Curtice of the Resolution Foundation noted that this figure is relatively large in the context of typical budget gaps, sometimes exceeding the total new tax and spending measures in past Budgets. Conversely, it is also important to consider this amount against other government decisions that regularly impact public finance forecasts, such as the persistent freezing of fuel duty, which the Institute for Fiscal Studies (IFS) estimates could cost around £5.5 billion annually by 2029-30.
Prevalence of Funding Gaps
Government ministers contend that it is not uncommon for spending decisions to be made with funding details resolved in subsequent Budgets. Examples include the reversal of winter fuel payment cuts, significant spending during the Covid-19 pandemic, and the 2018 NHS funding package, all of which had their funding sources clarified later.
Thomas Pope, chief economist at the Institute for Government (IFG), stated that while not ideal practice, such funding gaps do occur. He classified the DIP's funding gap as relatively 'modest' compared to historical instances of spending decisions made between Budgets.
Credibility of Proposed Savings
The Treasury has outlined several sources to fund the defense increase, including a 1% cut to other Whitehall departments' capital spending budgets, aiming to raise £1 billion annually. Additional cuts are planned for the energy (£500 million per year) and transport (£200 million per year) departments, impacting road investment. Sales of public sector assets are projected to generate around £275 million per year.
Another £600 million per year in savings is anticipated from 'Treasury support for ongoing international objectives and more efficient defence procurement.' This includes the Treasury assuming responsibility for future financial commitments to Ukraine post-ceasefire, which, while potentially freeing up resources for the Ministry of Defence (MoD), effectively shifts these costs within the public sector. Max Warner of the IFS warned that if these new Treasury responsibilities require spending, other budgets might face further pressure.
Further efficiencies are expected from the MoD itself, through initiatives like automating 20% of its human resources and finance departments by 2028, reducing consultant spending, and leveraging Artificial Intelligence for approximately £50 million in annual 'digital' efficiencies. The most significant efficiency savings, estimated at around £1 billion annually, are projected from reforms in 'acquisition' – the process of buying new defense equipment, which has historically been prone to budget overruns.
However, public finance experts express caution regarding the guaranteed delivery of these savings. Carl Emmerson, a partner at London Economics, highlighted that the government already has ambitious efficiency targets embedded in departmental spending reviews, making the new challenge even more demanding. Thomas Pope of the IFG commented that 'efficiency savings' can sometimes translate into cuts and a reduction in services.
Source: BBC News
