Britain's Ministry of Defence (MoD) has been warned that inflation and the global energy crisis are likely to hit its defence budget hard.
In a report by the National Audit Office (NAO), the MoD was told that it will have to make "difficult decisions" in order to meet its budget.
The NAO has been assessing the affordability of the MoD's equipment plan, which sets out its spending on equipment procurement and support projects for the next 10 years.
The latest plan covers the period from 2022 to 2032 and outlines how the MoD will spend £242 billion ($295.5 billion) on equipment over the next 10 years and make efficiency savings of £13.5 billion.
However, the NAO says it is being optimistic and that it has not accounted for the Ukraine war, the current energy crisis or inflation and predicts a £3 billion overspend.
"The [defence] department has assessed that the plan is affordable over the period 2022–2032. This is based on financial data from March 2022 and reflects ongoing improvements to its affordability assessment," the report says.
"However, its assessment continues to be based on optimistic assumptions that it will achieve all planned savings. It will also take some important decisions that affect the plan’s costs in the next financial planning round. While the plan continues to serve a useful purpose in reporting to parliament on planned expenditure, the volatile external environment means this year’s plan is already out of date.
"The department faces significant and growing cost pressures which will have an immediate impact on its spending plans. The department believes it can manage these pressures but has left itself limited flexibility to absorb any cost increases on equipment projects, or across other budgets.
"It needs to address the financial challenges promptly to avoid falling back into old habits of short-term cost management, which do not support longer-term value for money. The cost pressures are also likely to undermine the pace at which it can modernise the Armed Forces. The department will need to make difficult prioritisation decisions to live within its means and retain enough flexibility in its plan to respond promptly to changing threats.
"Our assessment shows that the department faces significant pressures to keep the plan affordable, which affect its ability to deliver equipment projects as planned."
According to the spending watchdog, the MoD has not accounted for external cost issues.
"The department has not reflected the impact of growing external cost pressures, such as inflation and the Ukraine conflict, on the plan’s affordability," it said.
"Rising inflation, higher utility costs and adverse exchange rate movements will affect the plan’s affordability. The department seeks to manage these risks using a range of measures, such as forward purchasing foreign currency and using firm-price contracts.
"However, it has not reflected inflationary cost pressures in the plan’s affordability as its assessment is based on financial data at March 31, 2022 and it did not fully understand the impacts at that point.
"The rapidly changing economic environment means that the affordability position reported by the department is out of date, despite it publishing the plan earlier than in previous years."
The report reveals that the Royal Navy withdrew plans to fund Type 32 frigates and multirole support ships in July due to funding issues.
Former prime minister Boris Johnson announced the funding of Type 32 frigates in 2020.
The spending warning comes after the launch this week of HMS Glasgow, the first of the Royal Navy’s new Type 31 frigates.
An order for 13 of these frigates is currently being processed at Scottish shipyards.
Australia tour of Pakistan
March 4-8: First Test, Rawalpindi
March 12-16: Second Test, Karachi
March 21-25: Third Test, Lahore
March 29: First ODI, Rawalpindi
March 31: Second ODI, Rawalpindi
April 2: Third ODI, Rawalpindi
April 5: T20I, Rawalpindi
Our legal columnist
Name: Yousef Al Bahar
Advocate at Al Bahar & Associate Advocates and Legal Consultants, established in 1994
Education: Mr Al Bahar was born in 1979 and graduated in 2008 from the Judicial Institute. He took after his father, who was one of the first Emirati lawyers
The five pillars of Islam
1. Fasting
2. Prayer
3. Hajj
4. Shahada
5. Zakat
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Killing of Qassem Suleimani
Volvo ES90 Specs
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Some of Darwish's last words
"They see their tomorrows slipping out of their reach. And though it seems to them that everything outside this reality is heaven, yet they do not want to go to that heaven. They stay, because they are afflicted with hope." - Mahmoud Darwish, to attendees of the Palestine Festival of Literature, 2008
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The biog
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Ben Stokes (captain), Joe Root, James Anderson, Jonny Bairstow, Stuart Broad, Harry Brook, Zak Crawley, Ben Foakes, Jack Leach, Alex Lees, Craig Overton, Ollie Pope, Matthew Potts
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How to get exposure to gold
Although you can buy gold easily on the Dubai markets, the problem with buying physical bars, coins or jewellery is that you then have storage, security and insurance issues.
A far easier option is to invest in a low-cost exchange traded fund (ETF) that invests in the precious metal instead, for example, ETFS Physical Gold (PHAU) and iShares Physical Gold (SGLN) both track physical gold. The VanEck Vectors Gold Miners ETF invests directly in mining companies.
Alternatively, BlackRock Gold & General seeks to achieve long-term capital growth primarily through an actively managed portfolio of gold mining, commodity and precious-metal related shares. Its largest portfolio holdings include gold miners Newcrest Mining, Barrick Gold Corp, Agnico Eagle Mines and the NewMont Goldcorp.
Brave investors could take on the added risk of buying individual gold mining stocks, many of which have performed wonderfully well lately.
London-listed Centamin is up more than 70 per cent in just three months, although in a sign of its volatility, it is down 5 per cent on two years ago. Trans-Siberian Gold, listed on London's alternative investment market (AIM) for small stocks, has seen its share price almost quadruple from 34p to 124p over the same period, but do not assume this kind of runaway growth can continue for long
However, buying individual equities like these is highly risky, as their share prices can crash just as quickly, which isn't what what you want from a supposedly safe haven.
Australia squads
ODI: Tim Paine (capt), Aaron Finch (vice-capt), Ashton Agar, Alex Carey, Josh Hazlewood, Travis Head, Nathan Lyon, Glenn Maxwell, Shaun Marsh, Jhye Richardson, Kane Richardson, D’Arcy Short, Billy Stanlake, Marcus Stoinis, Andrew Tye.
T20: Aaron Finch (capt), Alex Carey (vice-capt), Ashton Agar, Travis Head, Nic Maddinson, Glenn Maxwell, Jhye Richardson, Kane Richardson, D’Arcy Short, Billy Stanlake, Marcus Stoinis, Mitchell Swepson, Andrew Tye, Jack Wildermuth.
Killing of Qassem Suleimani
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