Has the time come to the move the cost of Trident replacement out of the MoD budget?

On 29th July 2010 the then Chancellor, George Osborne, announced that the MoD would have to fund the capital costs of replacing the Vanguard class submarines (Successor) from within its own core equipment procurement budget, instead of from the Treasury Reserve as had been expected. Defence Minister at the time, Liam Fox argued strongly that funding Successor from within the MoD would be hugely damaging to the rest of defence. He lost his argument with Osborne, but time has proved him right about the consequences.

Contrary to popular belief, the costs of the UK nuclear deterrent have always come from the MoD budget. The source of funding for Trident has always been contentious. Maintaining Continuous At Sea Deterrent (CASD) has been both a blessing and a curse for the Navy. While a top government priority and a prestigious responsibility, the running costs were moved from the MoD to the Navy’s budget in the 1981 Defence Review. This has inevitably has impacted directly on funding for other naval programs and a major contributing factor in hollowing out the navy.

Trident is widely perceived as a ‘political’ weapon, a national instrument and there is a strong case that it should sit outside a single service budget. It is also disproportionate to allocate the vast capital cost of the successor project to one of the smaller government departments. (In real terms, the MoD’s budget has approximately halved since the original Trident project of the early 1990s). Precedent exists for this arrangement. HS2 and Crossrail are also large long-term projects and they are funded from the Treasury budget, rather than by the Department of Transport.

The spending on the Successor project will peak in the next 5 years and will severely constrain MoD cash flow. The most challenging issue is the cost fluctuations or overspends which could force the MoD to find additional savings on an annual basis. The costs of building the Dreadnought submarines are likely to flex and alter considerably, year-on-year. The program would be better-managed holistically within a 30-year envelope, rather than under in-year budgetary frameworks which means that every other part of the MoD budget will suffer.

George Osborne’s excuse in 2010 was that by making the MoD fund the Trident successor programme, it would be incentivised to manage costs better if it was responsible for the budget. The reality is that even if it exercised the best management practice in the world, holding all the financial risk and inevitable cost growth leaves the MoD out of pocket. Already this financial year, £300 million in savings will have to be found within the defence budget to cover growth in expenditure on Successor. The construction program will see costs rise to almost 10% of the defence budget at its peak sometime between 2019-20. It is these peaks and unexpected over-runs that are a greater problem than the overall total cost.

The annual cost of maintaining Trident is around £2.5Bn per year, split roughly evenly between operating the Vanguard class submarines and running AWE Aldermaston where nuclear warheads are manufactured and refurbished. Pictured is HMS Vanguard currently undergoing mid-life nuclear refuelling in number 9 Dock at Devonport. (Photo: Maps data ©2017 Google)

Understanding the capital costs

Government has earmarked £31 Billion for the capital costs of the Successor project (with an additional £10bn contingency fund which most analysts expect to be fully used or exceeded). Precise figures are hard to come by, but the £31 Billion can be broken down into ‘ballpark’ figures something like this:

  • Already spent on the assessment phase, design, facilities and long-lead items for first 2 submarines – £6.1Bn
  • Construction of four Dreadnought class submarines – £16.4Bn
  • Development of PW3 reactor – £1.4Bn (This project is already in trouble and likely to over-spend)
  • Upgrades to infrastructure at Barrow (construction yard) & Faslane (submarine base) – £3Bn
  • New nuclear warhead design and manufacture at Aldermaston/Burghfield – £3Bn
  • Extending life of Vanguard submarines in operation until 2028 – £1.6Bn
  • Joint US/UK Trident D5 missile life extension programme – £250M

The MoD ups its game

Recognising the great risks and magnitude of the task, the MoD has already established a new executive agency – the Submarine Delivery Authority (SDA) employing 1,300 people to oversee the Dreadnought construction program. Inspired by the success of the 2012 London Olympics Delivery Authority, the SDA is separate from DE&S and has the freedom to recruit the best managers to ensure the Dreadnought class are delivered on time and budget. It will also be responsible for the remaining Astute class submarines and support of submarines already in service. The SDA is led by Ian Booth, former head of the Aircraft Carrier Alliance that has built the ships on time and on budget. The Dreadnought submarines will be delivered by a similar MoD, BAE Systems and Rolls-Royce alliance. The SDA will report to the newly created Director General Nuclear (Julian Kelly, a former Treasury trouble-shooter) who is responsible for all aspects of the defence nuclear effort including submarines and warheads, from procurement through to disposal. Despite their effort to manage the Successor program with the best people available, funding challenges will remain a concern for the MoD.

Paying the premium for our ultimate insurance policy

Many opponents of nuclear weapons will use the cost argument as a good excuse to axe Trident. Fortunately this government, an overwhelming number of MPs and the majority of the general public recognise the critical importance of our deterrent. To put the costs in perspective, over its 35-year lifetime (assuming we continue to spend approximately 2% GDP on defence) Trident will consume an average of 6% of the annual defence budget, equivalent to 0.13% of total government spending. The annual running costs of Trident are about the same as what we spend on the NHS in a single week.

Unilateral nuclear disarmament on cost grounds would be a dangerous blunder and signal the end of Britain was a leading world power. At the same time, we must not allow our conventional forces to be so weakened that Brexit Britain is perceived by the rest of the world to be disengaging and retreating behind its nuclear shield.

The deeper reserves of the Treasury make it far better equipped to cope with the variables in the lengthy Successor programme. Moving the cost centre will not make it any cheaper but would immediately stabilise the MoD budget at a time when pressures are mounting.

With a budget that is already too small, the challenge of the Trident renewal program threatens to undermine and damage conventional capabilities even further. There are a growing number of MPs who recognise this and would back a change in Successor funding. General Sir Richard Barron’s recently exposed the perilous state of UK defence saying any further cuts would leave the government “responsible for tipping the armed forces into institutional failure”. Making this change would be a big step to remedy some of the funding problems of the Navy, Army and RAF.