MoD's attempts to save cash 'drive up equipment prices'

'Pay later' approach exacerbating financial woes, says watchdog
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Britain's defence budget is "unaffordable" and faces a black hole of up to £36bn, a scathing report from the financial watchdog will warn today.

The scale of the cash crisis emerged as the Defence Secretary, Bob Ainsworth, prepares to announce spending cuts to help divert more resources to the war in Afghanistan.

The National Audit Office today discloses that short-term cost-cutting at the Ministry of Defence (MoD) has backfired by actually driving up the final price tag for military equipment.

In the face of a projected deficit of between £6bn and £36bn, the MoD is trying to put off bills by adopting a "pay later" approach to spending.

But the National Audit Office (NAO) says such delays will mean higher eventual costs to the taxpayer.

It points to the construction of two Queen Elizabeth class aircraft carriers which are due to enter service within six years. The project has been slowed down to save £450m, but the NAO condemns the delay as a false economy because it will increase its cost by £1.124bn, amounting to a £674m increase in its original projected expense.

Work on new Astute class submarines has also been deferred, saving £139m in the short term, but increasing their final cost by £400m.

The NAO also warns that frontline operations could be damaged by the attempts to trim defence spending. It cites a decision to save £194m by reducing from 80 to 62 the numbers of Lynx Wildcat helicopter numbers being built – a move that will reduce planned flying hours by one-third.

The NAO report found the price tags for the 15 biggest schemes rose by £1.2bn in 2008-09, of which £733m had been caused by deliberate delays.

Describing the current defence programme as "unaffordable", it says that closing the gap will require bold action by whichever party wins the next election. Edward Leigh, chairman of the Commons Public Accounts Committee, said the MoD was "building up trouble for the future". He said: "The MoD must ask itself tough questions, even about its biggest programmes such as fast jets and how the submarine-based nuclear deterrent should continue to be delivered. My own view is that there cannot be any sacred cows."

Mr Ainsworth is today expected to announce cuts of around £1.5bn to "low priority" defence projects and backroom costs over the next three years.

It is understood they will include redundancies among civilian staff, closing an RAF base, scaling back Britain's military presence in Cyprus and reductions in IT spending. There are also likely to be cuts to the fleets of Harrier and Tornado jets.

In the Commons yesterday, Gordon Brown set out plans to spend £150m to track where insurgents are planting roadside bombs, and £10m on handheld devices that identify the bombs.

The Prime Minister said he had drawn "great confidence" from meeting British troops during a visit to Helmand at the weekend.

But he warned: "I am under no illusions there will be hard fighting ahead."

Nick Harvey, the Liberal Democrat defence spokesman, said the NAO report provided further evidence that defence spending was in a "shambles".

Liam Fox, the shadow Defence Secretary, said: "We have now had a succession of reports describing disastrous project management and shocking incompetence with taxpayers' money, as well as a preoccupation with the short term which threatens our long-term security."

Quentin Davies, the Defence minister, said: "We fully accept the need to address shortcomings in our long-term equipment planning and that is why we are working on a strategy for acquisition reform, which will be published in the new year."

MoD spending: In numbers

£733m The amount that the MoD's deliberate delays in payment added to the price of the 15 biggest schemes last year

£400m The amount added to the final cost of the Astute class submarines by a decision to defer work which will save £139m in the short-term

£1.1bn The amount added to the final cost of a project to build two aircraft carriers by a decision to slow it down to save money