Recommendation 5

The Department has ignored the worsening economic environment in its latest Equipment Plan and faces significant financial pressures on its equipment programme. The Department has not included external cost pressures, including inflation and foreign exchange movements, in its central assessment of the Plan’s affordability. This is despite identifying when it produced the Plan that inflation could increase project costs by up to £2.1 billion over ten years. It did not include this inflationary pressure in its affordability analysis despite it being more than 80% of the Plan’s forecast surplus of £2.6 billion. Inflation has since risen higher than the March 2022 forecast, and the Department accepts it will struggle to manage affordability as a result. Further, the pound to dollar exchange rate has remained below the Plan’s worst-case scenario for several months, increasing the cost of several major Plan programmes. In the worsening economic environment, there is an increased possibility that some of the £25 billion of risks that the Department deemed unlikely—and has not included in cost forecasts—may occur, further increasing pressure on the Plan. Cost of living increases caused by rising inflation also mean that the Department might struggle to attract and retain staff with the skills it requires to deliver equipment programmes. We do not think that the Department has sufficiently taken these factors into account when considering the affordability of the plans. Recommendation 5: After the Integrated Review refresh, the Department must: • urgently reassess the affordability of its equipment procurement and support programmes; • move quickly to achieve the assumed savings; and • assess the level of headroom it needs to respond promptly to changing external events. We will seek an update from the Department at an evidence session in 2023.