385. In the light of the publicity surrounding the funding and management of the defence
programme in 2003 and 2004, the Inquiry examined two related questions:
•
the size of the MOD’s core budget and whether it imposed constraints on operations in Iraq; and•
whether the imposition of controls on the MOD’s management of its resources by the Treasury in September 2003 had an impact on operations in Iraq.386. The 1998 Strategic Defence Review (SDR) signified a major shift towards
expeditionary armed forces, involving the rapid deployment of sustainable military force often over long distances.224 The SDR recognised that while the collapse of
the Warsaw Pact had removed a direct military threat to the UK, indirect threats still persisted. Countering those threats would require more mobile, responsive and flexible armed forces.
387. Section 6.3 describes progress in implementing the shift in military capability
required by the 1998 SDR.
222 Minute McKane to DG Resources, 15 April 2003, ‘OP TELIC: Recuperation Costs and the Cost
of Lessons Learned’.
223 Letter PS/Hoon to PS/Boateng, 30 April 2003, ‘Operation Telic: Iraq Costs Update’. 224 Ministry of Defence, Strategic Defence Review Command Paper 3999, 8 July 1998.
388. Speaking to The Independent on Sunday in 2007, Lord Guthrie, Chief of the
Defence Staff from 1997 to 2001, said that he came close to resigning during the negotiations over the 1998 SDR:
“We had taken the Treasury by the hand through it all and thought we were home and dry … Then at the last moment [Mr] Brown tried to take a lot more money out of it. If he had, the whole thing would have unravelled.”225
389. Mr Hoon told the Inquiry that when he arrived at the MOD, in October 1999, there
was “quite a strong feeling that it [the MOD programme implementing the 1998 SDR] was not fully funded”.226
390. Sir Kevin Tebbit, MOD Permanent Under Secretary from July 1998 to November
2005, told the Inquiry that when he arrived at the MOD he estimated that the department was “about half a billion short” of being able to implement the SDR, although his
colleagues did not agree the shortfall was that large.227 The MOD had tried but failed to
“recover the position” in the 2000 Spending Review.
391. Sir Kevin told the Inquiry that the MOD’s resource position in 2002 had not affected
the decision to mount a large‑scale operation in Iraq:
“While I think the core budget was insufficiently funded to deliver the SDR force structure, that doesn’t mean to say that I felt that the funding wasn’t there to conduct the [Iraq] operation, or indeed to sustain our objectives in Iraq, on the basis that we were planning to hand over, on the basis that we were not intending to stay … beyond a certain period …”228
392. Mr Woolley told the Inquiry that the SDR set out a high‑level strategy, and it was
a question of judgement whether a particular level of funding was sufficient to deliver that strategy.229
393. Mr Woolley identified three factors which, in his view, caused the “budgetary
pressure” that the MOD faced in 2002:
•
the year‑on‑year efficiency savings that the 2000 Spending Review had required;•
the cost of salaries, fuel and equipment rising faster than inflation; and•
exchange rate fluctuations.394. The SDR New Chapter, published in July 2002, continued the shift towards
expeditionary capability.230
225 Independent on Sunday, 11 November 2007, Tony’s General turns defence into an attack. 226 Public hearing, 19 January 2010, page 127.
227 Public hearing, 3 February 2010, page 3. 228 Private hearing, 5 May 2010, page 38. 229 Public hearing, 2 July 2010, pages 10‑12.
395. In early 2002, Mr Hoon wrote to Mr Brown to request an additional £500m for
2002/03 above the MOD’s 2000 Spending Review settlement.231 He argued that the
inadequate size of the MOD’s 2000 Spending Review settlement, and the cost of expeditionary warfare, had produced a £770m hole in the MOD’s budget. The MOD was prepared to absorb £270m of that.
396. No.10 wrote to the Treasury on 19 March 2002 to record that the MOD and
Treasury had reached agreement that the bid would be considered sympathetically within the context of the 2002 Spending Review (which was already under way).232
397. Mr Blair attended a meeting with the Chiefs of Staff, Mr Hoon and Sir Kevin Tebbit
on 21 May, to discuss current operations and resources.233 Adm Boyce said that the
Armed Forces had “been under‑resourced since the SDR” and they “could not continue to make do”.
398. Mr Boateng wrote to Mr Hoon on 10 July, confirming the MOD’s settlement in
the 2002 Spending Review.234 Mr Boateng stated that the settlement represented
1.2 percent annual average real growth in the MOD’s total DEL, and 1.7 percent annual average real growth in the MOD’s near‑cash DEL (the previous budgeting basis), and that it would permit the phased implementation of the SDR New Chapter. The table below summarises the settlement.
Table 4: 2002 Spending Review: MOD settlement, £bn
2002/03 2003/04 2004/05 2005/06
Total DEL235 29.3 30.9 31.8 32.8
399. The settlement also provided an additional £500m in 2002/03 to “sustain activity
levels and retention levels, and help offset the wider impact of the rate of military operations”.
400. Annex A to the settlement letter confirmed that: “In general, the Ministry of Defence
will have unlimited ability to move funds between separate resource and capital sub‑programmes within its budget.”236
401. Budgets allocated in the 2002 Spending Review reflected, for the first time, the
implementation of full Resource Accounting and Budgeting (RAB).
231 Letter Hoon to Brown, 31 January 2002, ‘The Defence Budget in 2002/03’. 232 Letter Heywood to Bowman. 19 March 2002, ‘Defence Spending – 2002/03’. 233 Note Rycroft, 21 May 2002, ‘Prime Minister’s Meeting with Chiefs of Staff’. 234 Letter Boateng to Hoon, 10 July 2002, ‘SR2002: Ministry of Defence’. 235 Defined in the settlement letter as RDEL plus CDEL minus depreciation.