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By Professor Malcolm Chalmers for RUSI.org
Previous RUSI analyses have estimated that the most plausible central scenario for the future defence budget is a 10-15% real terms reduction over the next six years. This central scenario has now been revised in light of the announcements in the Budget. It is now estimated that the core defence budget could be cut by up to 15 per cent in real terms over the next four years.
Given the difficulties involved in making sharp and rapid reductions in procurement spending, the personnel budget will have to bear a significant share of this cut. It is therefore projected that there may have to be a reduction of around 15 per cent in total Ministry of Defence (MoD)personnel numbers, including cuts of 30,000 in military personnel and 13,000 in the number of MoD-employed civilians. Further discussion of the policy choices that these reductions will require is provided in previous RUSI studies.
The Budget delivered to Parliament on 22 June confirmed that most of the burden of reducing the UK's record budget deficit will be borne by spending cuts. It also confirmed previous commitments to protect health and overseas aid spending. As a result, in the absence of further savings elsewhere in the forthcoming Spending Review, the average reduction in the spending of other, 'unprotected', departments - including defence - will be 25 per cent in real terms over the four years to 2014/15.
Defence can draw some comfort from the Chancellor's acknowledgement in his Budget speech of the 'particular pressures' facing the education and defence budgets. This may be an indication that these two areas will be asked to accept smaller reductions than other unprotected departments. Even so, given the high proportion of unprotected expenditure that they consume, neither education nor defence will be able to avoid severe reductions over the next four years.
Because existing contractual obligations make it hard to quickly, and significantly, reduce the proportion of spending that goes on equipment, it will be hard to increase the proportion that is spent on personnel. The freeze on public sector pay for the next two years, including spending on armed forces pay, will therefore provide some welcome relief for MoD planners.
As a result of the pay freeze, it is projected that the average cost of MoD personnel will rise by only 0.7% per annum over the next two years, well below economy-wide inflation of 2.1% per annum. This estimate assumes that 25% of the MoD workforce, accounting for around 15% of MoD personnel spending, will receive the flat-rate £250 annual increase promised in the Budget. Because members of the armed forces (up to 1*) will continue to receive annual pay increments, it also assumes that sharply reduced levels of recruitment will lead to 'incremental drift' in average military pay levels throughout the next four years.
It is possible that the Armed Forces Pay Review Body will seek to restore previous private-sector relativities for military personnel once the pay freeze ends in 2012/13, not least because of concerns over recruitment and retention. For the purposes of constructing this estimate, however, it is assumed that no significant pay 'catch-up' takes place during the next four years. Instead, it is assumed that real military pay levels are increased by 2% in real terms in both 2013/14 and 2014/15.
The aggregate effect of these assumptions is that, over the next four years, average MoD pay levels increase by around 12%, compared with an increase in general prices (measured by the GDP deflator) of 9.8%. If, as our central scenario suggests, total real spending on personnel falls by around 13%, total personnel numbers would therefore have to fall by around 15% by 2014. Total personnel numbers would then be reduced from 283,000 to 240,000. If spread proportionately, this would lead to a 30,000 cut in military personnel numbers, together with a reduction in civilian personnel numbers of around 13,000.
 Malcolm Chalmers, 'A Question of Balance? The Deficit and Defence Priorities', Future Defence Review Working Paper 7, June 2010. This and other RUSI briefings are available at www.rusi.org/fdr
 Total DEL in 2010/11 is £380.0 billion, from which £122 billion in UK health spending and £8 billion in total aid spending is deducted.
 Budget 2010, p. 5.
 This is the scenario highlighted by the Institute for Fiscal Studies. Rowena Crawford, Public Services: Serious Cuts to Come, IFS, 23 June 2010. For the purposes of this calculation, 'schools' includes all non-tertiary education spending.
 Budget 2010, Table C5.
 As of March 2010, there were 197,840 armed forces personnel (of whom 19,620 were untrained). There were also 85,590 FTE civilian personnel in post in March 2010. Source: Defence Analytical Services Agency.