U.K. Defense Budget Gap Set to Widen, RUSI Says

Spending cuts under consideration by the U.K. government threaten an 11 billion-pound ($16.7 billion) hole in the defense budget, a research organization said.

“If the 2013 spending review leads to further defense spending cuts, the extent of the prospective gap between planned spending and available resources could be significant,” Malcolm Chalmers, research director at the Royal United Services Institute, said in a report published in London today. The defense ministry “may need to find around 11 billion pounds in savings over 10 years,” he said.

The government said last month it brought defense spending plans in line with budget projections following more than two years of efforts to plug a mismatch of more than 70 billion pounds. Lower tax receipts, brought on by a lack of economic growth, are leading to a new round of budget cutting as the government extends its austerity program.

“There are indications that defense, along with some other, relatively smaller departments, will be the main focus of savings efforts,” Chalmers said. A further possible spending cut of 2.5 percent in the 2015 budget review would increase the funding gap to about 17 billion pounds.

Slowing inflation could further crimp available funding for equipment, Chalmers said. Prime Minister David Cameron has promised that annual spending on equipment will increase by 1 percent more than inflation starting in 2015. Revised inflation projections mean expenditure could be curtailed to 17.7 billion pounds rather than 18.8 billion pounds in the fiscal year starting in April 2021, according to Chalmers.

Successor Submarine

There will be increased pressure on purchases of combat aircraft, helicopters and other hardware as the U.K. increases spending on modernizing its nuclear arsenal, Chalmers said. The government will decide in 2016 whether to build new submarines to carry nuclear missiles, though it has already awarded BAE Systems Plc (BA/) and Rolls-Royce Holdings Plc (RR/) design contracts.

Spending on the submarines and related weapons will grow to 35 percent of the total procurement budget early next decade, Chalmers said.

The growing mismatch between available funds and spending plans may mean another defense-strategy review is needed before the one planned in 2015, Chalmers said, while noting that political challenges make it an unattractive prospect before the elections scheduled in May that year.

“The government’s strong preference is likely to be agreement on a program of further efficiency savings,” he said.

To contact the reporter on this story: Robert Wall in London at rwall6@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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