Recommendation 18

The affordability of the Plan is also under pressure from external economic factors, including rising inflation and unfavourable exchange rate movements. In March 2022 the Office of Budget Responsibility forecast that inflation would reach 8.7% by the end of 2022.47 The Department reported that this would increase cost pressure on the Plan by £2.1 billion, but acknowledged that this estimate might not accurately reflect rising inflation.48 By November 2022 inflation was higher than this forecast, at 10.7%, suggesting that this cost pressure is higher. The Department told us it seeks to mitigate the effect of inflation by using forward purchasing and firm price contracts, but we are unconvinced that this will substantially reduce the pressure.49 We are also concerned about the impact of unfavourable exchange rate movements with the pound-dollar exchange rate below the Department’s worst-case scenario in December 2022. The Department mitigates the volatility of exchange rate fluctuations with forward purchases. But, given the major purchases made from the United States, notably £6.5 billion over the next 10 years for F-35 aircraft, this could significantly affect the affordability of the Plan.50