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Ministry of Defence 'living beyond means'

The Ministry of Defence must learn to stop "living beyond its means" and start budgeting more realistically, the Whitehall spending watchdog said today.

The National Audit Office (NAO) accused the MoD of failing to place enough importance on financial management and racking up further costs for the taxpayer.

Repeatedly over-committing its budget had created shortfalls of hundreds of millions of pounds a year and a black hole of up to £36 billion over the next decade.

The new Government is conducting a Strategic Defence and Security Review, which is intended to rebalance spending.

But the NAO said ministers faced a "challenge" to ensure plans remained in balance in the longer-term.

Amyas Morse, Auditor General and head of the NAO, said: "A crucial question for the Ministry of Defence is whether it can use strategic financial management to stop living beyond its means.

"The current Strategic Defence and Security Review will provide an opportunity for the MoD to balance its books in the short-term.

"The greater challenge will be to keep spending plans affordable in the longer term. The department is not at present placing enough emphasis on financial management to be able to do this."

Tory MP Richard Bacon, a member of the influential Commons Public Accounts Committee, accused the MoD of being "financially incontinent".

"There are very difficult and painful choices ahead and the MoD's fancy financial footwork has long ceased to impress," he said.

"The Ministry of Defence needs to face reality and stop living beyond its means."

The NAO highlighted the MoD's tendency to revise upwards its annual budget within the year

It said the forecast deficit for 2011/12 had increased from £185 million to £500 million after it reassessed its planning assumptions.

Dealing with the over-commitments later created further costs for taxpayers - including via the renegotiation of contracts - and was "destabilising".

"Delaying projects leads to significant increases in costs," the NAO said in its report.

The watchdog acknowledged that the MoD was not solely responsible for some of the increases in costs. For example, inflation in the defence sector was higher than elsewhere.

But it insisted that the department could do better with what was within its control, and needed to make financial management more central to its decision-making.

It warned: "Perpetuating the cycle of over-committed plans, short term cuts and re-profiling of expenditure, would mean the continuation of poor value for money for the taxpayer on the projects affected and a reduction in the funds available to support front line activities."