Welcome to the Treasury Committee on Wednesday 8 July 2026. Today, I am delighted to welcome colleagues from our sister Committee, the Defence Committee, to question Ministers from His Majesty’s Treasury and the Ministry of Defence. We have Lucy Rigby, who is the Chief Secretary to the Treasury and a former member of this Committee, so she knows what to expect. Luke Pollard is the Minister for Defence Readiness and Industry at the Ministry of Defence. They are joined by officials from their Departments. Conrad Smewing is the director general for public spending and the co-head of the Government Finance Function at His Majesty’s Treasury, and Aneen Blackmore is the director general for finance at the Ministry of Defence. We are talking about money and procurement and capability today. We are looking forward to short, sharp answers from our witnesses on this hot day. I will start with you, Minister Pollard. It was widely trailed in the run-up to the defence investment plan that there was a £28 billion gap in the budget. You got a £15 billion increase. Is there a gap between the funding that you got and what you wanted to deliver in the defence investment plan?

Okay, so what was the gap between what you initially asked for and what you got? I know you are talking about the profile, and we will come to the CDEL and RDEL points later.

Specifically on the front-loading of the RDEL to CDEL?

No. What was the gap between what the defence investment plan needed and what it got? And if it is not £28 billion, what is the difference?

I see. As Minister Pollard said, the £28 billion figure that you referred to is not something we recognise. I was not in post at the time, but my understanding is that that was never a formal ask made of the Treasury. Obviously, there is £15 billion additional funding in the DIP, but the right way to look at this is as additional funding right across the piece, which is over the four years.

Yes, but that is not quite the question I asked. The Ministry of Defence and the defence review work done by Lord Robertson and colleagues determined the capability that was needed and then the money that was available. Do you recognise that there is a gap between the capability requirement—the request from the MOD—and the money that was available from the Treasury?

I would have to repeat that there was never a formal ask of that.

We know how government works; a lot of negotiation goes on. Was there a figure higher than what you eventually provided from the Treasury?

As you know, there was a long period of negotiation. The £15 billion figure in the DIP is what was alighted on by the Prime Minister, the Chancellor and the Secretary of State for Defence to fund all the capability detailed in this document. As I said, it is key to make it clear that the £15 billion additional in the DIP is part of the entirety of the £300 billion over four years.

Okay, but we had a Defence Secretary resign, Chief Secretary, because he did not think there was enough money to cover the defence investment plan. It is not credible to say there was not a gap, because there was a gap between it and what he and others in the Ministry of Defence believed was necessary to fund our defence capability. What is that gap? At some point, especially with a change in Prime Minister coming, we will need to address that as a nation.

You are absolutely right to refer to the previous Defence Secretary. His resignation letter is in the public domain, and he said what he said, but the DIP that has been delivered is different, and it contains a different capability.

In the space of two weeks, it is massively different from what the former Defence Secretary was talking about.

There are additional things that are covered within the defence investment plan. That is absolutely right.

Can you be precise on what those specific things are?

Specifically, a £400 million—

What I am driving at is—between one Secretary of State leaving and another signing off on a defence investment plan—what precisely changed? It is amazing to negotiate something in two weeks that the previous Defence Secretary had not got money from the Treasury on in a period of more than 18 months.

Minister Pollard may want to speak to this as well, but as for exactly how and why the current Defence Secretary is comfortable with the DIP as it is, he had very good reason to be so. As to your specific question about what is different, there is a £500 million transformation fund that is intended to go towards some of the efficiencies that the MOD will make over the period, a £400 million contribution towards the multilateral defence mechanism and, importantly, an additional £600 million that goes to new types of capability, particularly autonomous capability.

All those things are true, but it also includes cuts, such as the Type 83 destroyer and the early retirement of the Wildcat helicopter. These will not be capabilities that the Ministry of Defence continues, so that is a reduction in capability, and there is an effective cut.

Can you remind us how long it was between former Secretary of State John Healey resigning and the sign-off of the defence investment plan? How many weeks and days was that?

So in two weeks, miraculously, the capability and the money came together, and it was all fine?

You seem to be telling us that you do not want to acknowledge that there was a gap in funding, but that by reprofiling and focusing on rebalancing between RDEL and CDEL—capital and resource—all these issues will resolve. But let us be clear: there was a reduction in capability from what was requested, Chief Secretary, and the Treasury did not fund that. The Treasury insisted on cuts.

Can I ask that to the Chief Secretary?

What Minister Pollard is getting at—indeed, I was trying to allude to it too—is that the capabilities are different. There is an emphasis on more technology and more autonomous technology in particular. That goes to the changing profile of the spend.

I think I need to go to the Chair of our sister Committee. I am delighted to have three members of the Defence Committee guesting with us today; this is very much your territory, Mr Dhesi.

Thank you very much, Chair, for facilitating the opportunity for Defence Committee members to guest on your Committee. Despite various protestations, we were not able to get any Treasury Minister before our Committee.

Well, we have resolved that.

Thankfully, we have resolved that, and that is why we are here. Chief Secretary, do you agree that the Government’s primary role and duty is to defend the country?

Yes.

If that is the case, why did a Treasury Minister not appear before us, given the importance of defence spending and the debate that was going on around this?

I am not exactly sure from which point and onwards particular requests were made, but I can see the logic—were this to have been the logic—in waiting until publication of the DIP.

Okay. That has been getting on for over a year.

We have dealt with that.

Does the Treasury see defence as a drain rather than a driver of growth?

Defence, in my view, is a core engine for growth.

So it is not a drain.

No. Obviously, this is not peculiar to this country, but much has been made of the relationship between the Treasury and the Ministry of Defence. Because of the changing nature of the threat that we face—that threat is clearly increasing; I am very clear about that—it is increasingly important for the Treasury and the MOD to have a very constructive relationship. That is simply from the point of view—

But the key question is whether you and the Treasury see it as a drain.

No, I do not see it as a drain.

Good. Defence Minister, do you also disagree with the former Defence Secretary, who said that the Treasury sees defence as a drain rather than a growth?

If we come to the £15 billion and the current defence investment plan, do you see that that is better than the previous defence equipment plans?

We had the reviewers of the strategic defence review, including the lead, Lord Robertson, in front of the Defence Committee. They were not too complimentary about the contents of the DIP. If you think it is better, why do we not have the details? In previous defence equipment plans, we had a full 10-year expenditure profile. Where is that? Why have we only got these headline figures, in particular, relating just to the next four years?

You are absolutely right that the DIP covers the next four years. As I was saying in response to a question from the Chair, the £15 billion is part of an additional £300 billion over the next four years. Most importantly, the Prime Minister has been clear that at the point of the next spending review, defence will be the No. 1 priority. We have a spending review next year.

But that is next year for the spending review. What we are looking at is the detail. At the moment, there is a palpable lack of detail. There is no 10-year expenditure profile. There is no breakdown between procurement and support costs. Where is all that? How is the defence industry, especially our British defence industrial base, supposed to know which way to chart if it does not have a year-by-year profile?

As for exactly how the money will be spent, I think that there is detail in the DIP, and Minister Pollard can talk to some of what capability can buy. That point around defence being the No. 1 priority at the next spending review is really important, because that will set the trajectory for the purposes of our NATO targets. Those NATO targets are really important. As you know, we have always met them. Those commitments are absolutely foundational.

Mr Dhesi has been pushing you about where the financial details are. There is less financial detail in the defence investment plan than there has been in the defence equipment plan. I have spent over a decade looking at defence equipment plans. The National Audit Office goes through this in detail. Why is there less? Where is that financial detail? Will it ever be published?

What exactly do you mean in terms of the financial detail? You don’t mean where the money will come from—

It is the 10-year expenditure profile. The previous defence equipment plan showed that there was a £16.9 billion deficit in 2023. You have not quite charted out—perhaps the Defence Minister can answer this then. When will the Defence Committee, the Public Accounts Committee, and particularly the National Audit Office, get access to this detail so that we can ensure that there is effective parliamentary scrutiny?

It is very different from the defence equipment plan.

There was a lot of detail on that—

So we are all going to wait till the spending review comes. That is what I am saying. The DIP has only three or four years, whereas we were promised in the Defence Committee and by the former Defence Secretary, including on the Floor of the House, that this DIP would be better than the previous defence equipment plans. We would have more detail. You mentioned the National Audit Office. They have not got a Scooby Doo where this information is. Do we have a date for when this detail will be coming to us?

Perhaps the Chief Secretary can advise us. Do you know when we will have this detail—when the NAO, who you work very closely with, will have the detail?

I don’t, I am afraid. Can I turn to my official? I want to give you another chance.

Briefly, because I think we know how the process works. The NAO will be looking at this and will produce reports for the Public Accounts Committee.

Yes. That is right, as the Minister said.

In the full detail that they would normally go into for the defence equipment plan—going forward more than the four or five years?

As the Minister said, there is going to be an update to Parliament every year before summer recess. The NAO is going to be involved in producing that update, as it has been before. The MOD will set out the detail.

We might want to take some of that off to our sister Committee, the Public Accounts Committee. I just want to go back to the point about the capability cuts. You talked about how, over that two-week period between one Secretary of State resigning and the defence investment plan being published, you just decided to do different things—in a two-week period. Can you just be clear what you decided not to do that helped to get it across the line in affordability terms?

So they were taken before John Healey resigned?

That was agreed by the former Secretary of State for Defence?

Are you saying that you are confident that there were no cuts to capability as a result of the defence investment plan?

But the Secretary of State resigned because he was not confident that enough was being funded.

I think another word for changes is cuts. Some of us have looked at the reduction, whether with regards to frigates or with regards to integrated air and missile defence, which previously had £1 billion included in the DIP, but now only has about £780 million. Out of all the cuts to capabilities, what was the most difficult decision, Minister?

For you personally.

We are here to look at the money. Our sister Committee will continue to pick up the capability issue with you; we are here to drill into the money. On that, I am going to bring in the right hon. John Glen MP. He is the former Chief Secretary to the Treasury, so he knows a thing or two about public spending.

I don’t know about that. The Government have typically framed their commitment on defence expenditure as a percentage of GDP. I think it is fair to say that they have said they will reach 2.7% by 2029-30. It is also true that the former Secretary of State, John Healey, resigned because he thought spending would need to reach 3%. Presumably, he felt that was not going to happen. Chief Secretary, how is that gap of 0.3% explained to the public? What do the Government think we can do without, and why can we go lower than 3% in a few years’ time?

I don’t think there is any suggestion whatsoever that people go without. To take Mr Dhesi’s point, the defence and security of this country is the No. 1 duty of any Government. That is inherent in the Prime Minister saying that defence will be the No. 1 priority at the next spending review. We have made progress towards the 3% target. The question now, which you are rightfully asking, is how we continue that progress. The assurance that the Prime Minister has given is that we will make those targets and we will set out exactly how we will get there at the point of the next spending review.

So what you are saying is that the additional 0.3% between the commitment made explicitly, by virtue of what is in the defence investment plan and all the capabilities set out, will mean an increase to 3% of GDP by 2030 at the spending review?

We have said that in the next Parliament we will get to 3%. I understand that the question is being asked, “When in the next Parliament?”, and I come back to the fact that the Prime Minister has said that defence will be the number one priority at the next spending review. The Ministry of Defence’s budget is already growing faster than that of any other major Government Department. As I have said, it is £300 billion over the next four years. Those are really significant extra sums that are going into defence spending.

I do not dispute that. I recognise that it is a significant addition, and you have said that a number of times. However, there is quite a big difference between an implied number from what you have set out as the collective view of Government, to be achieved by 2029-30, and where you would get to between this Parliament ending in the summer of 2029—its furthest extension—and presumably five years later. For the world of defence and people making co-investments in capabilities for the UK, it is surely reasonable for them to say that there is a big difference between 3% in 2029-30 and 3% in 2034 and that makes it impossible to plan and execute co-investments with industry. Do you accept that?

I do not accept that it makes it impossible, no. I understand why people are asking that question—indeed, if I was in the defence industry, I might well be asking that question too. But it is worth acknowledging and making the point that these are difficult decisions. The DIP is about an additional £15 billion, outside of a fiscal event, and these are not easy decisions. We will no doubt come on to where the money is coming from.

These are not unforeseen challenges—even before the general election.

No, they are not unforeseen. However, the nature of the threat that we are facing is increasing and increasing rapidly. I think we are doing absolutely the right thing by significantly increasing defence spending. Do we need to significantly increase it further? Yes. I will passionately make the case, both in and outside the Treasury, for that to be the case. My point is that this is not straightforward and that money is finite—

I understand that; I have had some exposure to that, and I understand how difficult the decisions are. However, we have seen a very experienced and hugely respected Member of Parliament and Defence Secretary resigning an office that he had spent a very long time preparing for, presumably because he was not confident that in due course, the level of commitment would be attained that would meet the expectations to defend the country. Otherwise, he would not have resigned, would he?

As I said, John Healey’s resignation letter is public. On a personal and professional level, I was extremely sorry to see him leave his post. As we have said, the DIP is a significant increase in funding. I will not go through it again, but I very firmly believe that we have to significantly increase defence spending. I am trying to gently make the point that, not least because of capital reprioritisation that we are having to make vis-à-vis other Departments, and the fact that this is outside a fiscal event, these changes take a little time to work through and they involve trade-offs.

I understand that. What I am trying to get at, and the big question that the country wants answered, is this: how much do the Government think we need to spend to defend the country? At the moment it appears that it is 2.7% by 2029-30, and then 3% at some point, potentially as late as 2034. Is there any more specificity you can give on when we would reach that 3% figure?

Materially, in front of the Defence Committee yesterday, Lord Robertson said that when they did the defence review, they were working on the basis of 2.9%, so there was more money on the table. They crafted it on that basis. Perhaps you could pick that up as well, chief secretary.

How much do we need on our defence?

We have talked about what the NATO targets are. The Prime Minister has been clear that we will align ourselves with those targets. That is the target. The target is a reference to a percentage of GDP; to link that to the point I was making previously, a larger percentage of a smaller economy is not in anyone’s interest. There is an extent to which we have to find a balance—you have plenty of experience in that. The important thing is that we are committed to aligning ourselves with those NATO targets.

Ms Rigby, you talked about trade-offs just then. Earlier in the discussion, there did not seem to be an acknowledgment that this plan has any gaps, reductions or shortfalls from what the Ministry of Defence might have wanted previously. That does not seem to make sense to us, not just because of the resignation of John Healey, but because of course it is not going to get absolutely everything on its wish list—that is how a negotiation with the Treasury works. How prepared do you think the Government are to have the conversation about the trade-offs that will be involved in increasing our defence commitment, bearing in mind that, historically, you have had this peace dividend and been able to increase spending on welfare, health and pensions quite dramatically, and now it looks like we are entering into a world where that peace dividend is coming to an end?

To be candid, because of the increasing importance of defence, both in relation to the increase that we are facing and as an economic priority, there will have to be greater public discussion, potentially in the context of the next spending review and also going forward, about public consent and how people feel about spending on defence vis-à-vis other priorities. The point that has not been made yet, but perhaps ought to be, is that we are going to see a new Prime Minister, who will be in place at the point of the next spending review. It will be for a Government led by the next Prime Minister to make decisions on relative levels of spend.

You have focused on spending there. That is what this review has done. We have talked about moving around spending across different Departments. Is it going to be a bigger question than that? We have heard evidence that, to get from 2.6% to 3.5% of GDP, you are talking around £30 billion to £40 billion extra.

Or £500 per person in the UK.

Yes—equivalent to 3p to 4p on all rates of income tax. Is that a discussion that the Government are prepared to have with the public—that they may have to pay significantly more in tax to pay for defence?

I can talk to what the DIP does. For the reasons I have set out, it would be for a Government led by the next Prime Minister to make decisions about tax.

Do you recognise those types of figures?

We have had evidence on this.

Well, I will read that.

It is that sort of scale, isn’t it?

As I said, I can talk to the DIP, which does not involve greater levels of taxation.

But the Government have stated their ambition to get there. That is why we are asking questions about it. I have put it in tax terms, but you could put it in spending terms. If we are going to draw that amount of money out of other spending Departments, that looks pretty like austerity. Which of those courses are you planning to take?

These are decisions for the future Government to make, not just in relation to taxation, but in relation to reprioritisation.

But you are the Chief Secretary to the Treasury. You are the one in the Government who oversees all the public spending. Has the Treasury looked into the trade-offs that Mr Dean has highlighted about what it would actually cost to deliver this?

To deliver the 3.5%?

Yes.

Or is that just tomorrow’s problem, and we will deal with it later?

Have you done number-crunching on this in the Treasury?

Forgive me, Chair—I might turn to my colleague.

The maths is very easy to do; it is 3.5% minus 2.7%, times GDP. The question of what the trade-offs and policy decisions involved are is far more difficult to work through. That is one of the reasons why we are talking about 3% of GDP in the next spending review. You need to understand exactly what the pressures and opportunities are in all the rest of public spending.

Have you done an analysis of the trade-offs that would need to be done in the short or long term to deliver it, as Mr Dean has highlighted?

That is the analysis that is done in Budgets and spending reviews.

But obviously a lot of work goes on well ahead of a spending review and a Budget. Chief Secretary, surely you will be having discussions and star chamber moments with Ministers about the profile of their budgets and how we are spending it right now, so you will be looking at all these issues all the time. Are you doing the work to consider the options, as Mr Dean has highlighted?

No is the short answer. Obviously, we do not know when the next Budget will be exactly. As we said, the next spending review has to be in ’27—

You are the person in the Government in a really important job overseeing public spending. Money comes into the Exchequer, and you have to make sure that the money that goes to Government Departments is spent well. Surely, unless you are completely in denial, this will be, as Mr Dean has highlighted, very high up your agenda, because of the possible trade-offs and challenges.

All the normal discussions that you would expect to have in advance of fiscal events I am absolutely sure will be had, but I cannot talk to the content of meetings that I have not had.

Mr Pollard, let us move on to a different trade-off about the split between capital and revenue expenditure—you have touched on that already. There is obviously a leaning into capital expenditure; is that because the fiscal rules drive spending in that way, and there is more headroom on the capital side, generally speaking, because of the way the rules are set up? Would you make different decisions if we had a different way of treating our fiscal rules? To give you a specific example, something like cyber-resilience might involve training up a whole load of people, and that might be the better thing to do from a resilience perspective than buying more equipment; but, at the moment, the fiscal rules drive you down a particular direction to spend on capital instead. Do you feel that restraint?

Could I refocus the fiscal rules question? With the accounting definition as it is between revenue and capital, can you see how it could create artificial constraints sometimes, because you kind of assume the revenues, consumption and capital investment? It seems that there are some really worthy human capital investments that the Defence Ministry could make. Is that something that you are looking at?

I take the point. The main consideration of the fiscal rules from the point of view of the DIP was trying to ensure that everything is in keeping with the fiscal rules, which the Chancellor has been very clear about. These are, in her view, iron-clad. Indeed, the security of our economy has a relationship to our national security.

It is not about the overall borrowing constraints. It is about what drives the spending within that envelope.

It was important that over 60% of the additional cash for the purposes of the DIP is RDEL. An even higher proportion for the purposes of the uplift this year, close to 75%, is RDEL, which, as the Minister has set out, is important for the purposes of readiness.

There is also an argument that if you do not put some capital in early, you delay projects that take a very long time to deliver, but we will come on to that.

I have a question for the Chief Secretary. The DIP suggests that the MOD will dispose of assets: none in the current financial year, but £300 million next year and the following year, and then £500 million. I cannot find a figure for 2025. It does not appear that anything was disposed of in 2024. What is your confidence level that £300 million will be hit next year and the following year, and then £500 million the year after?

“Good confidence” is the short answer, but let me unpick that. A review was announced at Budget 2025 for the purposes of asset sales. You are absolutely right that what is set out is over three years. There is no provision for 2026-27, but these asset sales will be scored at the next fiscal event later this year. We have taken the view that disposing of assets that are genuinely surplus to requirements and underused is a good use of public money. The proceeds as a whole, which total £1.1 billion, are an important part of funding for the DIP.

Mr Pollard, have those assets been identified?

I have to say good luck to you on that, and hopefully your drive will deliver it. In the past, the MOD has not always delivered on its promised release of land, so we look forward to seeing results on that. I am sure the PAC will be following it closely.

Further to Mr Glen’s questions about targets, the former Defence Secretary John Healey said that the Treasury was “in denial about the commitment…made to NATO”, and that it was “still planning on 3%, but not until 2034-35.” Chief Secretary, has the Treasury in effect ignored the commitment that the Prime Minister made at the Hague summit?

No, not at all.

So you do not agree with the former Defence Secretary’s comments.

No.

What about you, Defence Minister? Were you privy to these conversations? Was the Treasury planning on reaching the 3% target by 2034-35?

So you were not involved in that. Chief Secretary, did you not have a plan at any point? What was the Treasury’s plan to reach 3% by 2034?

Forgive me; I do not want to avoid the question, but I have been in this role since May. Clearly, these discussions—

But you speak for the Government.

Surely somebody must have done a handover.

In answer to Mr Glen’s question, I was seeking to make clear that the Prime Minister has said that we will meet that 3% target at some point in the next Parliament. I understand why people are asking exactly when that target will be met, but it will depend on the next spending review and how money is allocated.

In front of Mr Dhesi’s Committee yesterday—he can go into detail if we need it—the principal point that the witnesses raised was that they were working on defence readiness on the basis of 2.9%. Is that true, or is it not? That is what they said in front of Mr Dhesi’s Committee, and I have no reason to think that they would be telling anything other than the absolute truth.

Agreed.

I cannot dispute the truth of what they are saying, Chair, because I do not know the answer.

Mr Smewing, you have been in the Treasury for a long time. Do you know the answer to that question?

I do not recognise that 2.9% number. The spending review in 2025, before the strategic defence review, set out funding levels reaching 2.6% of GDP. Those were the funding levels that were public at the time.

So you do not recognise the 2.9% figure. Do you know about it, Ms Blackmore?

Not that can I recall. However, I would say that, as part of the strategic defence review, we had a range of scenarios bounded within what we had agreed with Treasury.

What was the range?

Recognising that we would hit 3% at some point in the next Parliament, we wanted to ensure that we understood what the impact of that planning would be. It was very much based on a range of scenarios, so that we could—

So was the range from 2.6% to 3%?

Across the next Parliament, so that we understood what opportunities were available to us, but staying within the constructs that we had agreed with Treasury.

So where did the 2.9% figure come from, which was cited in Mr Dhesi’s Committee yesterday?

This is all getting a bit woolly, because nobody recognises the 2.9% figure and someone is being economical with the truth. It could be the former Defence Secretary, who is saying that it was the Treasury’s aim to reach 3%, but only by 2034, which would allow just one year for us to reach 3.5% by the NATO-agreed 2035 target. That in itself would lead to defence inflation, but I have no doubt that other Committee members will go into that later on. Nobody seems to know when and where we will reach that figure. Let me turn to whether this is fully funded. I stood on the Floor of the House congratulating the Defence Secretary, saying, “Well done. We now finally have a defence investment plan in place. I congratulate him, because it is backed by the Treasury.” Lo and behold, we were to find out later that almost a third of that £15 billion extra spending was to be found at a future Budget in 2026. Is it actually fully funded, Chief Secretary, or is it just smoke and mirrors?

It is certainly not smoke and mirrors. You are right in the sense that roughly two thirds of the £15 billion in the DIP has been identified. However, it is certainly not uncommon for Governments of any colour to announce things outside a fiscal event, as the DIP was, and to say, “And this money will be identified at the next fiscal event.” To take an example, the SEND reforms that we announced in February this year are £4.1 billion, and that was going to be dealt with at Budget. In 2018, a much larger figure of £20.5 billion for the 2018 NHS five-year settlement was outside a fiscal event. It was announced, and it was said by the Government at the time that the money would be found at Budget. This is not an uncommon way to operate.

I agree with you, Chief Secretary, that it is not uncommon; in previous years, when we were in opposition, I stood up and accused Conservative Governments about that very fact. But the issue here is that £6.8 billion of the money is, supposedly, to come out of net zero transport and other Departments’ capital budgets. We have heard very little about where these cuts will actually fall. Does the whole of the DIP actually rest on canning the A46 Newark bypass or the A38 Derby junctions?

No. A proportion does. You will have seen the funding table breakdown. One penny of every pound in Departments’ capital budgets gets you to this top slice; I am picking now the £10.3 billion, as opposed to the £4.7 billion. But then, as you rightly refer to, there is an additional amount that is coming from DFT: £800 million.

We haven’t got the details. Do you have the details with you on where exactly the £6.8 billion is coming from?

In relation to DFT and DESNZ, which are both paying more, and Departments more broadly that have had that top slice to capital budgets, it is for Secretaries of State to work out over the summer period, prior to Budget, exactly where—

So we haven’t got the detail on that.

As you know, the DFT is consulting on the closure—

They are still consulting. We haven’t got the detail of that.

They have to offer it up, but they will work out the detail.

And the £2.4 billion that has also been allocated, whereby the Treasury is taking on the Ukraine security guarantees element?

Yes.

Let us just be clear. If it comes to pass, will this amount to some extra borrowing or be scored against the Treasury special reserves?

Mr Smewing will correct me if the detail is wrong, but the majority of that £2.4 billion comes from risk transfer, which MOD was holding.

Contingent liabilities.

Treasury is instead taking on that risk.

It is not extra borrowing.

It is an additional way in which MOD’s spending power is increased.

It will be funded from the reserve in the same way as other unexpected operational requirements for the MOD.

Chief Secretary, you talked about it being very normal in public spending to determine the detail of spending commitments later down the line, but in July 2024, when you were not in post, the Government talked about a £22 billion black hole, which included pay rises promised for certain people and money for the cross-party agreement on infected blood, which Ministers are now delivering. They were projects that had been promised but had not been fully funded in the normal way, as you have just described. That was described as a shocking £22 billion black hole unfunded by the previous Government. How can you reconcile those positions?

I don’t think I said that it was very normal. I said it was not uncommon, and I referred to a couple of examples—the £20.5 billion in 2018 and then our SEND reforms. Because of the legislative timetable, as was the case with our SEND reforms, or indeed the fact of having the Ankara NATO summit, it is sometimes just not possible to wait until a fiscal event to tie a sum of money to something. So that is what we are doing.

Thank you for that clarity.

In addition to the similarities to the black hole commentary in 2024, another thing that was made a big point of in the 2024 Budget was the previous Government’s tendency to take from the capital account to plug gaps in revenue expenditure. We have just heard that up to 75% of the increase, I think you said, is to do with RDEL in Defence. We have a whole list where money is being taken out of capital accounts to fund it. Are you not repeating the mistake of the previous Government?

It is very important, to me and to the Chancellor, that a key distinction between the economic policy of this Government and the last is capital spending. A figure often talked about is the £120 billion in extra capital spending that we are making relative to the last Government. Importantly, that £120 billion is not changing, because what we are talking about is reprioritisation. I take the point about cuts to capital for each Department, but as I say, this is one penny in every pound, because we are saying that defence is a priority.

The stated intention as you set it out was clear, and the criticism was that we are not going to borrow from capital to plug gaps in revenue expenditure. We have made it clear today that a lot of the increase in the defence budget will go into revenue, and it is being taken from the capital allocation of other Departments. Have I got that wrong?

Mr Smewing will correct me if I am wrong, but the proportions of RDEL relative to CDEL as I set them out are right. The one penny in every pound, which comes from capital budgets, gives us a total of £4 billion over the four years. Mr Dhesi took us through some of the other ways in which the MOD’s spending power is increased, and Ms Minns referred to asset sales as well. As you have seen from the funding breakdown, it is not just the capital pieces that contribute to the £15 billion.

Can I ask about defence bonds? I do not specifically mean separating out from the fiscal rules, as I know some people have proposed; I mean offering fixed-term issuance of a legally hypothecated bond, which other nations have considered doing. What analysis has the Treasury made of that type of proposal? Is it still under consideration?

It is not under consideration, because the Chancellor and the Prime Minister have been clear that they view war bonds—defence bonds—as simply another form of borrowing. We continue to spend £1 in every £10 of public money on servicing our debt. A key objective of this Administration has been trying to get borrowing and debt down, which is why the DIP does not involve further borrowing.

Let’s go into the risks of defence spending. As we alluded to earlier, we are talking about a lot of backloading, potentially in the next Parliament, to try to reach 3.5% at some point. Chief Secretary, do you acknowledge that backloading undermines UK credibility and deterrence, since future capabilities might be cancelled? Have you identified that as a key risk?

No, we haven’t. There is a substantial uplift going into the MOD’s budget this year. With reference to the funding table, those numbers continue to go up year on year. I come back to the point I made in answer to Mr Glen: does defence spending need to continue to go up substantially? Yes, it does. That is exactly why the Prime Minister set out that it needs to be the No. 1 priority at the next spending review.

Minister, are His Majesty’s Treasury and the Ministry of Defence aligned on how they perceive that risk?

So you’re not worried that this is back-loaded, and that it might put the UK’s perceived capabilities at risk? Let me also put it to you that the former Defence Secretary, John Healey, described being astonished that the funding allocated under the DIP included money to be found at the next Budget. When did you become aware of that?

When did you become aware that a lot of this money is going to be found at the next Budget or thereafter?

You weren’t aware. So it is not quite a full alignment because neither yourself, as the Minister of State for the Armed Forces under the previous Defence Secretary, nor the previous Defence Secretary were aware that a lot of this money will actually be found at the next Budget. In essence, Chief Secretary, were Defence Ministers kind of sidelined in this whole process around the defence investment plan because they did not know when this money would be found?

My understanding is that the element that you are referring to within the DIP, which is just over £1 billion a year, is in the context of total Government expenditure every year, which is £1.4 trillion. I think that is important—

That is all good. We all know about the overall economy, but we want to get into how aligned Defence Ministers are with Treasury Ministers—or are Defence Ministers left out in the cold?

No, that is not my understanding of how the discussions around the DIP work.

Mr Pollard, you said earlier that these discussions with the Treasury were held with the Secretary of State and you were dealing with the capability, but you are responsible for procuring all the capability, which means you are looking at the spending profile, no doubt. Surely you should be right at the heart and centre of those discussions.

Agreed, and the former Defence Secretary didn’t know either!

Isn’t there a gap there, if you are dealing with capability but not having the negotiations directly with the Treasury?

Can you just reassure us that, day to day as you are looking at—it used to be the defence equipment—the profiling of defence expenditure to deliver the capability that you are procuring, you are watching every budget like a hawk and following through the expenditure profile?

Is that what you do in defence procurement? It is just that you were talking about other people having the conversations with the Treasury. How often do you and the Chief Secretary meet to discuss the profile, and the run time and certainty?

So you are not in those meetings.

That is interesting. So you have not been in those meetings, and nor have you, Chief Secretary; it has been the Chancellor.

I have not been to a Defence Oversight Board since I was appointed to this role, but that is because of the point at which I joined. I should say that the previous Chief Secretary did attend.

So it is something that the Chief Secretary did.

Let's move on to another risk. The funding of the DIP rests to a huge extent on efficiency savings—£10.7 billion rests on that, Chief Secretary. We have all seen that movie before; we have heard it all before whereby we are going to have all these efficiency savings that will free up this money. But how tangible is that? What analysis have the Treasury and the MOD done to make sure that the risks of this to delivery are not substantial?

To be really clear, the right number to see the £10.7 billion of efficiencies against is not the £15 billion in the DIP; I think it is the £298 billion that is going over the next four years. They are the right relative figures to see each other against. I can talk in more detail about what the £10.7 billion of efficiencies ought to break down as, but as a total figure, that is roughly 5% cumulative efficiencies. Mr Smewing will correct me if I am wrong, but I do not think that is very dissimilar to what other Departments are being asked to make.

Just to be clear, that is 5% a year?

Cumulative.

Cumulatively over three years. It is almost exactly in line with the level of efficiencies set out across Whitehall in SR ’25. We had this discussion quite early on in the process of running through the finances for the DIP.

Who in the room can discuss those efficiencies? Mr Pollard, is it you as Defence Procurement Minister?

Would it not be easier—obviously, the strategic direction has been set—for you to be in a room with your officials to hammer this out, regularly? Mr Smewing looks anxious at the thought.

No—quite the opposite. At the time, the Secretary of State for Defence, his official team, the Chief Secretary and the Defence team in the Treasury were all in the same room discussing exactly this.

What about on a day to day, week by week basis? How do you monitor those efficiencies—that you will deliver them, Mr Pollard, and that you are happy that the Department will get them delivered, Ms Rigby?

Efficiencies in the broadest sense are a key part of what we will be looking at for the purposes of the next Budget and spending review. The process around the DIP has been unique for getting it to this point.

We will focus on the efficiencies now. Efficiencies are often promised.

And never realised.

The defence equipment plan has been littered with the bodies of promised efficiencies that do not mature in the end. How will you make sure that you deliver on that?

It is important that we do. From our point of view, that will involve a closer degree of interest, I think it is fair to say.

When you say closer degree of interest, what is that? A quick chat over the phone? Sitting down with Gantt charts? Who will be doing that work between you? How will you oversee it?

We have the Government efficiency framework, which is a framework against which all Departments are reporting efficiencies. The MOD will be using the same framework, and it will be between the Treasury and the finance department in the MOD to track those and deliver them as they happen.

Ms Blackmore, you are very on this, then?

Absolutely. One of the early Defence Oversight Boards was specifically focused on efficiencies, very much identifying that will be a key component in the plan and wanting to ensure that between us and Treasury Ministers, there is visibility and confidence in our approach.

One could cynically add, “Until there is another crisis in a defence project.” I could mention Ajax, but we could go down that rabbit hole for a very long while. Mr Dhesi?

Agreed, Chair. Before I move to my last question, it is good to hear that people will be on the ball, because of the perennial procurement problems within defence, whether it is Ajax or other things. Let me move on to the final bit of risk that I am really interested in, which is about the Defence Nuclear Enterprise. Given that it is almost a fifth of the budget, does this represent a single point of failure? Will any overruns on this damage other conventional capabilities?

Of course, there will be oversight by Parliament of that particular budget under the new Committee that is being established, which is long overdue.

Mr Pollard, the DIP obviously makes several bets on uncrewed and autonomous technology, citing the lessons from Ukraine, but witnesses we have had before us warn of over-learning lessons from Ukraine and assuming that autonomy fixes everything. Briefly, are you confident that the Ministry of Defence has got the balance right on this?

That is helpful, Mr Pollard. Time is marching on. The exam question that we are all facing here is, can we defend the United Kingdom? Can you reassure me that the decision to significantly shift emphasis in this way was driven by that exam question and not financial considerations?

Minister Pollard, could you give us a situation report on the state of the current relationship between the MOD and the Treasury? How do you recommend that both sides manage any risks that might be inherent?

Minister Pollard, you are describing the improvement over the last two years; I assume you are referring to that period. However, would you agree that over the last month there has been mistrust between the two sides?

In the specific week after his resignation?

What provoked those big changes you have seen?

Would you say that John Healey’s resignation put pressure on the Treasury to come to a resolution on the DIP?

How would you improve the situation such that future Defence Secretaries would not have to resign to get to the conclusion they desire?

Chief Secretary, what is your view of the situation report that Minister Pollard has just given?

I will start by saying that I had a slightly different upbringing to Luke, in the sense of the antithetical nature of the Treasury. Both my parents worked at Main Building and I was brought up in military communities, so I have certainly never seen the MOD as the enemy in all this. The reality, as you know, is that this is about public money, so the Treasury and the MOD have an interest in making sure that it is spent well. The Treasury will always have—again, as you know—discussions with Departments about levels of money and how money is best spent. And for some of the reasons that you have been through, that tension grew. However, what is really important, as I have said, is that if we are aligned, as we are, on the fact of defence and national security being the defining challenge of the next decade and potentially for longer, it is absolutely imperative that the Treasury and the MOD have a very, very, very constructive working relationship.

But would you agree that there have been problems in that relationship, over the last month in particular?

There have certainly been tensions in working out the details of the DIP. That is over a longer period. Obviously the Prime Minister—as has been detailed—was involved in those discussions as well.

So there have been tensions and those tensions have resulted in a Defence Secretary who is very well regarded across the House—as John Glen pointed out—resigning. How will you remedy that, so that in the future there will not be such tensions and they will not lead to such a situation?

In most part, by ensuring that we have a very constructive working relationship. Mr Smewing referred to the structures in place to try to ensure that closeness continues. But clearly, given the commitment the Prime Minister has made vis-à-vis the next spending review, that closeness and collaboration, in terms of not only levels of funding but some of the difficulties around procurement and the levels of efficiency that we have been talking about—

The panel is understandably being very diplomatic because you are colleagues, but in any military engagement you would want an accurate assessment of the risks that is fairly blunt and that outlines the problems we might face. That is what I seek from you, Chief Secretary.

My assessment of the risks of—

Of the current problems in the relationship so that we can then remedy them. We can all agree that a close working relationship would be beneficial, but I presume that is not what has happened.

I will take procurement as an example, because how money is spent is a really important part—and that is not just the £15 billion but the wider £300 billion. There are really important reforms within the DIP because we recognise that procurement in defence is difficult. You are procuring against a threat that is increasing and ever evolving within tight security arrangements.

We are going to come on to the detail of procurement in a moment.

Very quickly, please.

Are you saying it is easier in the heat of the moment than in the long term?

Minister, I recognise your depiction of an improved relationship in recent weeks, and I note the joint visits that you have done. But presumably, representing the Ministry of Defence, you would still be concerned that the Treasury has not done any work to prepare for the 3.5% commitment, as per the NATO obligation. If that work has not been done, how do you feel about that?

Can we talk about the dynamic of the relationship again? Most people understand across Government that the job of the Treasury and the Chief Secretary is to control public spending and ensure that we get value for taxpayers’ money—that is how I interpret it. But people also understand that sometimes, in the nature of your world, Mr Pollard, with the procurement of capabilities, you do not know at the point you start the procurement what it will look like. I recognise that. It is rather different from paying benefits or investing in schools. The Chair of this Committee set out in an article a couple of weeks ago in the FT that, having observed this for 10 years and more, the dysfunctionality of that relationship—it is your inherited wisdom, having grown up in Plymouth—is a fundamental dynamic of our state. Is it not now time, Chief Secretary, for a Department of Procurement with a joint Minister who is shared, as occasionally happens in some other areas, between the Ministry of Defence and the Treasury? That would mean that those ongoing situations where procurements get out of kilter with the initial expectations when money was agreed can be dealt with in real time. Indeed, the Ministry of Defence can benefit from some of the specialist skills the Treasury have in managing and controlling public spending. Would that not be a useful innovation to signal to the defence community that you recognise that something has gone wrong, and that something significantly different needs to happen to put it right on an enduring basis that you can have confidence in?

It is an interesting suggestion, but it is something I consider to be within my job description at the Treasury currently. As I alluded to earlier, there is certainly a recognition in the Treasury that procuring within Defence is difficult for some of the reasons you refer to. In May, we announced a series of reforms to the single-source contract regulations, but, to bring it back to the DIP, there are a series of things in there that are designed to be a bit of a financial reset moment for procurement. Minister Pollard referred to the annual update to Parliament on the financial position, but, really importantly, there is also going to be a new approach to how capabilities and programmes are initiated to try to avoid some of the overheating we have seen previously. As part of that, the Ministry of Defence will start work on a new programme only when that capability is demonstrably affordable, which is really important for the purposes of avoiding programmes being started that cannot be funded.

In essence, respectfully, you are saying that you have got that and you understand the need, and you have put in a few changes to secure confidence about how money will be spent before you agree to it. But I put it to you that the evidence of recent history—and going back many, many generations—is that something is quite flawed in this dynamic. You may be able to institute cultural change with some of those things you have put in, and I obviously do not doubt your intent to do that. But do you think that it will be enough, given the weight of history of all these procurements that have gone wrong and are followed by a call for more money? When I was Chief Secretary, the Secretary of State at the time said to me, “Your job is just to do what I tell you to do. You bean counters keep out of this.” That might have been Sir Ben Wallace’s way with the Treasury, and I took it in good grace and we kept a very cordial relationship, but the behaviour of Secretary of State John Healey in walking out on that very important job after working very hard with the Treasury for a long time, which I am sure he did very reluctantly, must surely say that we have to do something fundamentally different.

But the reforms in the DIP are intended to capture that. I referred to some of them, and there are others—

Chief Secretary, I can tell you that you go this way but once. You have an opportunity to tell this Committee today that you have personally reflected on the dynamics as they have worked through and you want to do something differently. You can assert that and we can collectively act on it.

We are doing things differently though, by virtue of what is in the DIP. I am telling you that I personally see this as part of my job description, to be working with Minister Pollard and others at the MOD. I guess at the root of your question is: what is different this time? Given the nature of the increasing threat that we have been discussing, this really needs to be right. As the Chair mentioned, there are far too many examples of where this process has gone wrong, Ajax being one of them. What is absolutely critical—this is a reference to Mr Dhesi’s efficiency point—is that this is a bit of a reset moment from the point of view of financial management, and that every single penny of public money put into the MOD’s significantly increased budget should be as well spent as possible. Part of that is about reforming procurement. There are other parts as the Minister referred to, buying British and—

I hear what you are saying. I must give Minister Pollard the opportunity to respond to the proposal by the Chair of the Committee on this joint mechanism to give—from the Ministry of Defence point of view, I would have thought—more opportunity to explain the evolving needs in the field, the evolving technologies that you are so familiar with, as well as a better ongoing dynamic, so that there would not be these big crisis points near a spending moment or preparation of a DIP. Might that not be advantageous from the Ministry of Defence’s point of view?

Do you think that the Treasury understands that different paradigm of decision making and that genre of technology?

I wish you well.

Chief Secretary, you have made many references to the changes in the new DIP that we had in July, versus the one that we had a few weeks ago. What has happened to change the terms of engagement so much between the two Departments?

In terms of engagement?

Yes. On the DIP.

As Minister Pollard referred to, the Prime Minister was very clear that he wanted to be able to announce the DIP prior to the NATO summit, so inevitably, as we approach a deadline, work intensifies in order to deliver.

Deadlines are very helpful. On procurement, for you to spend all the money that you are pitching for from the Treasury, Mr Pollard, it would be helpful for projects to be valued and assessed more quickly. The strategic defence review noted that, “for projects valued above £20m, it takes 6.5 years on average for a contract to be awarded.” How do you plan to shorten that and give the Treasury confidence that you are capable of managing large sums of money on those projects?

You talk about a change in energy in the system. Will there be changes in structure and more concrete processes that will help deliver faster contracting?

Do you have a target for where you want that six and a half years to get to? Do you have numerical targets?

How can the Treasury help the MOD to change the culture around procurement?

A key way—although there are several, and I will not repeat the answer that I gave to Mr Glen—is the £500 million transformation fund, because it allows the MOD to invest in things that will result in downstream savings, and one thing that has been identified is potential contract breakages, as well as some of the costs that arise from that. Reporting to Parliament on an annual basis is important as well. Holding an increased contingency is relevant too. The most important thing—I said I would not repeat myself, so I will just refer to it—is the new capabilities being undertaken only when they are affordable.

What lessons are being learned from the way we have procured in the past? A perfect example is Astute. They left it so late in deciding they could afford to buy it and order it that they started building it before the plans had been drawn up for it. Does the Treasury really understand what it means to order in defence? The longer you delay, the more expensive it becomes, yet this lesson never seems to be learned.

I understand, and there is a recognition of why procurement in defence is difficult—not least the fact that you are trying to procure capability that sometimes does not exist yet against an ever-evolving threat; I referred to the security arrangements. I totally appreciate that it is very different from buying other goods or services. We have to ensure that the recognition that it is difficult is reflected in some of the mechanisms that we have been talking about, and I come back to the importance of joint working.

I very much welcomed that pipeline, and the people of Barrow will welcome it too.

Obviously, some of that will be RDEL and some will be capital. Do you have an arrangement with the Treasury that the extra expense in one can be offset by saving in the other?

I get that, but if you are investing in people, that is a resource, but if you are investing in capital, that is capital. So you have arrangement with the Treasury about how you can smooth those, even though they are different bits of the budget.

In relation to that specific project, I have to admit I am not—

I mean in general. That is the project that Mr Pollard has just highlighted, but there must be others that are similar.

The rules that apply to the MOD are the same ones that apply to other Government Departments: you can move from revenue into capital, but not from capital into revenue.

Perhaps there is a bit of detail to get into. I am sure that the PAC will look at that.

So you feel that the changes made for this DIP and SDR will alleviate those problems, and they have learned the lesson from that. That is for both of you—I just want a quick yes or no.

This is not something that we have alighted on just for the purposes of the DIP. As we have been talking about, some of the reforms are contained in here and some are set out in prior documents.

But you believe that the Treasury now understands that we need long-term decisions to be taken earlier, rather than delayed.

Yes, and this is not peculiar to Defence; it is the case for many things, not least the 10-year infrastructure strategy.

Minister Pollard, would you agree that the lesson has been learned and that they now understand that long-term decisions have to be taken well in advance?

If that is well understood and defence is the No. 1 priority of Government, why did it take 12 months of arguing to get this across the line? Whether you say there was a gap in it and there was a number—everyone seems to agree that there was, apart from yourselves—it took a year of arguing between these two Departments, and a Secretary of State for Defence resigning, to get this really important, No. 1 priority over the line.

Negotiating.

We all realise how significant and difficult it was—

Okay, a year of negotiating between MOD and Treasury before we could actually get the DIP across the line. It is widely recognised that there was a gap in where the money was going to come from, and it took a year to get there. This is the No. 1 priority of Government and it has just got across the line in a year, and yet part of it is not going to be funded until the next Budget. Why was this not in the last Budget if it was the No. 1 priority of Government?

In direct answer to your question, I wish it had been quicker. I cannot be more candid about it than that. Minister Pollard may well say the same. I wish it had been quicker.

It seems like it is fine now because the two of you are getting on fine and it is all going to be brilliant, so is it all down to the people who were before you?

No, I am simply acknowledging that I wish it had been quicker.

Why wasn't it?

For some of the reasons that we have been talking about, including that with the DIP we are having to find £15 billion outside of a fiscal event. It does involve difficult decisions; we have talked about the £4 billion that is coming from—

So it was negotiations with other Departments that were causing problems.

Well, it is the reprioritisation of capital spending between Departments, which, as you know, is really important, and £15 billion is a significant amount of money.

Which Departments were particularly tricky in offering up their capital slice?

These were primarily, as we have been talking about, discussions between the MOD, the Treasury and No. 10. That was the nature of the discussions.

Ms Blackmore, was this a surprise to you? Surely there cannot just have been whole chunks of the MOD budget not funded. We know there were problems, but—

As the Minister said, it had been some time since we had done a full bottom-up review of the programme to refresh our view of the likely costs over the period. Alongside that, a number of additional factors were playing into the forecast; we spoke earlier about the operational tempo and the geopolitical environment. All of that added pressure into the programme. With that new pressure, we spent a long time reflecting on the options that we had and the sequencing of the choices, and working with the Treasury to agree that baseline.

Are we now in agreement that going forward both parties will be working hand in glove and helping each other to ensure that defence spending is on target and on track? So far, we have not seen that happening. Six and a half years for a contract over £20 million does not sound like viable business. All those SMEs out there need to know that that contract is coming through. How are we going to make sure that we get those across the line?

I do not want to repeat myself, or indeed Minister Pollard, in relation to what he said about changes to procurement. There is a lot in your question. At the root of it, though, is that closer working relationship on what is our No. 1 priority, and I am very clear about the importance of that.

I think the root of it is that Hadrian’s wall was built quicker than we can get these contracts out. It is really not acceptable. I am amazed that any of these businesses stay in business, to be honest.

On growth and industry, are the Government right to prioritise buying British?

Do you think that the MOD will understand the need to buy British and secure our sovereign capabilities and the supply chain over the cost ratio? If something overseas is slightly cheaper, the temptation has always been to go overseas.

Chief Secretary, do you think that weighting procurement towards British firms will increase the costs?

Not necessarily, no. There are real benefits, which Minister Pollard has set out, to having a Back British and Buy British policy, that go to your point about the supply chain as well. I think we can really strengthen particular British industries and particular sovereign capability in a way that is good not just for defence but for the entirety of our economy. It is also really good for exports and skills. There is a whole range of ways in which I think this will be good. Minister Pollard referred to jobs; I think the figure associated with the DIP is 60,000 additional jobs, and as you well know, there is a large number of jobs in defence as it stands.

There has been £6.8 billion reallocated from Net Zero, Transport and other Department budgets. Has the Treasury made an analysis of the net growth impact of that reallocation?

Of the net, no, I do not think that we have, although Mr Smewing will correct me if I am wrong. I think at least part of the reason for that will be the fact that those headline numbers have been set out—the extra £2 billion from DESNZ and £0.8 billion from DFT—but it is then with Departments to, over the process—

If you have not done that analysis, what would you expect?

It is a good question. I think we cannot do that analysis until—it is difficult to forecast, I would suggest. What is really important is that there is a recognition that, for the reasons that we have been discussing, this £120 billion of additional capital spending will remain—the number will remain there; this is just about reprioritisation—and that there are tens of thousands of jobs and a good many economic benefits that come with defence spending.

We welcome Alex Baker from the Defence Committee.

Thank you, Chair. I want to ask about international co-operation, particularly the debate between the multilateral defence mechanism and the defence, security and resilience bank. Chief Secretary, can you set out your understanding of the defence, security and resilience bank?

My understanding is that this is a means by which countries are responding to the need to increase our financing of defence by coming together to look at these things in a collaborative and joint way, for a range of reasons. Collaboration, including when it comes to procurement, for reasons that we can talk about, is a good and the right response to some of the challenges from the nature of the threat that we face.

It is a multilateral bank; obviously, multilateral banks have been used in lots of different sectors, but they have not been used in defence. You will have experience of multilateral banks doing other things for UK Government. Have you read the DSRB charter?

I have read quite a lot about DSRB. Have I specifically read the charter? Possibly, at some point, yes.

The Canadians will have sent you the charter, probably about 10 weeks ago. It is a 60-page document, having been through charter negotiations. I am really keen to push you: have you read that document?

I think I have, but I am more than happy to confirm afterwards.

It might have arrived just before you landed in post.

For reasons in relation not just to DSRB but to MDM, in relation to which there are numbers in the DIP—

How many weeks have you been in post? Can we clarify that?

Someone is going to tell me exactly when in May I was appointed, so I will—

I just thought it might be relevant. Carry on, Ms Baker.

Minister Pollard, the previous Secretary of State, who you worked for, sent an observer to the charter negotiations. We had a UK observer in the room for those charter negotiations. That observer presumably sent a read-out of those negotiations. Have you read that read-out? If so, could our Committee and the Treasury Committee have that read-out?

So you have not read that read-out.

You wouldn’t have been copied into the submission at all.

Could we, as Committees, have an opportunity to see that document? We can do it on a reading room basis. We have a way of handling confidential documents.

Chief Secretary, has anyone asked for the Bank of England’s advice—for its read-out on the defence, security and resilience bank?

I haven’t. Whether or not the Chancellor may have, I can let you know. I am afraid I do not know off the top of my head.

The Treasury’s position on this seems to have changed overnight. Many parties out there have acknowledged that MDM and DSRB do different things. I have been asking questions. For over a year, I have been campaigning on this and being told that we do not need DSRB because we are doing MDM. ADS and Make UK Defence are really clear that these are different things, and it seems that the Chancellor has now realised that they do different things. The Financial Times reported that the Chancellor accepts that the DSRB provides “important functionality” but “particularly for countries that have a smaller defence industrial base than…the UK.” The thing that DSRB solves is defence finance. We have a problem with defence finance in our industrial base. Does the Treasury accept that UK defence firms also face serious barriers to defence finance? This is not just a problem for nations with smaller defence industries.

Yes. When, I hope, we are able to bring forward the financing strategy later this year, you will see within that—or, I should say, some of the areas being looked at are some of the specific challenges that we know firms here face.

Therefore, DSRB potentially has a contribution to make, from a defence finance perspective, for the UK defence industrial base.

I do not want to go over the head of the Chancellor or indeed the Prime Minister. As you will know, the Prime Minister put out a joint statement with Mr Carney very recently—just prior to this Committee sitting, actually—where he talked about trying to seek opportunities between DSRB and MDM to collaborate closely and, really importantly, to ensure complementarity. That is really important.

We had nine nations sign a declaration for the defence, security and resilience bank at the NATO summit yesterday. Ukraine is one of them. Canada has led on this. Turkey also signed. Minister Pollard, are those serious defence nations?

There is a narrative that the MDM is for high credit-rated nations with established defence industries and the DSRB is for lesser nations with smaller defence industries. Do you think that is helpful in this debate?

The Chancellor has stated that she wants to bring the MDM and the DSRB together more formally. Is that the settled position of HMT?

The very latest I have read is the statement from the Prime Minister and Prime Minister Carney. I do not have it in front of me, but my understanding is that it is about ensuring complementarity and seeking to collaborate. I cannot recall if, when they are talking about collaboration, they are also talking about merging. But my understanding is that that is the very latest objective.

Clearly, from what the Chancellor said last night, she would ideally like the MDM and the DSRB to merge and become one thing. What does that mean in practical terms? Are we talking one balance sheet, separate balance sheets, shared governance or something else? What does this look like?

That is a very good question about the practicalities of what a merger would look like. I imagine there would be all those questions and more if you were seeking to merge two prospective institutions.

We have NATO facilities for joint procurement. We pay in and, as part of that contribution, we get facilities like the NATO Support and Procurement Agency. The UK does not use that agency. We are at the bottom of the user list, but the agency is set up for joint procurement. Have you assessed whether going down the MDM route works better than using existing facilities that we are paying for? OCCAR is also out there. There are various facilities that we could use.

My understanding is that the ambition for the MDM would be to work collaboratively with existing institutions. You are rightly getting at a question around duplication, to which my high-level answer—

My actual worry, Chief Secretary, is that you do not know the facilities that are there—we are pretty dismissive of NATO facilities; we always think we know best—and that we are just recreating the wheel. Is that true?

I am aware that the NSPA exists, not least from my time on the NATO Parliamentary Assembly, but as you said, there are other bodies too. My understanding, which I was going to come to, is that there are things the NSPA cannot do. You may know more about that than I do, but my understanding is that those limitations are a factor when it comes to consideration of the MDM.

Canada, one of our closest allies, has been trying to speak to us about this for months and we have not really engaged. Where is the UK-Canada relationship? Obviously, they are an ally that is in Five Eyes, NATO and the Commonwealth. We should be standing as close to them as possible. Where is the relationship at at the moment?

Canada is an incredibly important strategic partner for the UK. That has been the case over a vast sweep of history. Importantly, from a security point of view, there is Five Eyes, as you rightly referred to. We also have a trading relationship with Canada that is worth over £30 billion, I think. This is a really important strategic relationship for a whole bunch of reasons. My understanding is that discussions have been taking place with Canada for a wide range of reasons, but specifically with regard to the MDM and the DSRB.

Has that been happening at ministerial level?

I have not personally had discussions with the Canadians at a ministerial level.

Has the Chancellor?

I am not aware.

My understanding is that the Chancellor has had discussions with the Finance Minister in Canada.

With her counterpart in Canada?

Yes. And obviously the Prime Minister of Canada and the Prime Minister of the UK have just put out a joint statement on exactly this.

I am just not convinced that this has been properly looked at. I would love you to take away a commitment to properly look at this going forward.

One piece of procurement that has been puzzling the Committee a bit—perhaps it speaks to a less than fully functional relationship between the MOD and the Treasury—is the new medium helicopters contract with Leonardo. At one point back in February, it was being said by the Treasury that it had authorised the spending with the full agreement of the Ministry of Defence. Then the Ministry of Defence was said to have deprioritised that particular capability. Can you clear up what was going on there? Is it a priority? Were both parties very happy that the contract was signed? Why was the Treasury announcing something that the MOD did not appear to be wholly enthusiastic about?

Chief Secretary, that piece of procurement predates you. Do you have much knowledge of what went on with it?

I am certainly aware that this is about investing in what was a key industrial site and maintaining an area of real strategic advantage for the UK. Exactly as Minister Pollard set out, the difficulties with it stemmed from the fact that it did not align with the DIP timing and an earlier decision was necessary, but the decision that was arrived at was the right one, for the reasons that I have set out.

Finally, on the notion that the Treasury had to sign this off without the MOD being fully on board and that there was tension around the timing and the nature of the sign-off by the Treasury, as widely reported in the media, would you say that that was not the issue?

You are clear that you wanted the helicopters—the Ministry of Defence wanted the helicopters—and the Treasury wanted investment in Yeovil, so it was a happy marriage. Is that the answer?

I want to come back in on defence finance. When are we going to get the defence finance and investment strategy? It has been promised for a long time.

Chief Secretary, do you recognise that international banking regulations—Basel III and Basel IV, coming in from 1 January next year—play a role in really challenging defence to be able to get the cash flow, the finance, it needs to be able to have a growth mindset?

I certainly recognise that specific issues arise for defence companies when it comes to access to finance. That goes to a range of regulatory barriers, but also to some of the things that the Committee have been asking questions about, including long procurement cycles. There is a range of barriers. Enhanced due diligence is another thing. A range of things ought to be and is being properly looked at, not just by Government but by regulators. The Financial Conduct Authority is looking at defence finance. That is specifically framed through its wider SME access to finance call for input, but it is looking specifically at defence, because there is recognition of some of these issues.

Will you look at the impact that international banking regulations, specifically Basel III and Basel IV coming in next year, will have on defence in the years ahead?

Yes, I can commit to doing that, but I have tried to set out that it is not just about that. There is a whole range of not just international, but domestic regulation.

I happy for you to look at them all, but I would specifically like you to look at—

There is a range of things across the piece—like ESG ratings—but I take the point.

We in the Defence Committee are still getting reports of companies being debanked. I heard a report last week about a listed company being debanked. What are you going to do about that?

Do you have anything to add, Chief Secretary?

I only want to highlight the shared commitment we have that no legitimate company should be denied access to financial services solely because they operate in the defence sector.

To be clear, who is in charge of DFIS—the Treasury or the MOD?

We will look forward to scrutinising that in due course.

I think the Chief Secretary may need to leave now, so I have saved my questions for the defence side of things.

Apologies, I do need to leave.

Thank you for your time, Chief Secretary. The transcript will be available on the website in the next couple of days.

Sitting through this very interesting session with both of you here has been very valuable. It struck me that it has now been more than eight years since I was in the role of Minister for Defence Procurement. A lot has changed, but a lot remains the same. In terms of the strategic shifts, obviously we are going from a 2% world to a 3.5% world, and today has been about the shape of that journey. But there is also so much more autonomy in terms of the unmanned platforms that you are looking at. The other big thing has been inflation. I want to ask about inflation because, when I was Minister for Defence Procurement, the equipment plan over the coming 10 years was going to be £178 billion, I think. We are now nearly at the end of that 10-year period. If you take the average of inflation across the whole economy, where you needed £10 back in 2018, you will now need £13.42 just to buy the same things. Presumably that means 34% of the pressure on your budget is just coming directly from inflation—or do you have a different measure for defence inflation? Is it higher or lower than the average economy?

Twice the rate—so it could be as much as 70% more expensive to buy the same things that we were buying in 2018.

For the big-ticket items, which are obviously the submarines, how much has the cost pressure come from the non-negotiable and non-changing bits of the defence equipment plan?

Your budget has not gone up to reflect that, so what have you built into the future projection that will take into account the risks of inflation?

We have done a number of things in the defence investment plan to help to protect against or mitigate some of the impacts of inflation. We still see it as a very significant risk, as you would expect. There are two things in particular that I would draw to the Committee’s attention. First, we have introduced a departmental contingency. As you would expect, in our large programmes we always hold risk inside costing to mitigate against known risks, including inflation. We have introduced a departmental contingency within the defence investment plan. That is 1% this year, growing to 2% in both DELs as we go forward, to provide that extra buffer, given the history—

It does not sound like a big enough buffer. If you have experienced 70% inflation, versus the whole economy experiencing 34% inflation in the last eight years, that does not sound like an enormous buffer to me. Ms Blackmore, are the numbers at the end of the defence investment plan reflecting inflation, or are they just nominal?

They reflect the planned-for costs that we assume it will take to deliver over the period. That will include our assumptions on inflation over that period.

I have a couple of questions on the frigates. Minister, I wrote to you about the 50% steel tariffs that came in on 1 July, up from 25%. There was not a big change in the quotas for the sort of things that go into the defence sector. We heard evidence from Make UK that this would have a real cost impact. What has been put into the costing in terms of the impact of the steel tariffs?

But you will experience higher costs as a result of the tariffs.

I singled out steel tariffs because steel is the only one where the Government themselves have imposed the cost increase. I want to turn to shipbuilding and the pipeline of ships. There is always this tension in the shipbuilding programme between whether you delay and slow down, or whether that is counterproductive in the long run and a steady drumbeat of production might keep inflation in the sector under control. Have you done analysis on that? Where have you landed?

How inflationary is it going to be, if all the European countries are increasing their defence budgets simultaneously? You have said there is enough industrial capacity in shipbuilding, so you have been able to just come up with an optimal drumbeat, but if all the countries are simultaneously increasing their defence spending, there is presumably only a certain amount of people who can produce things. What would the industrial capacity landscape need to look like to avoid significant inflation in the sector?

On shipbuilding, how much industrial capacity is there that would be non-inflationary?

Are there any sectors where there is inadequate industrial capacity and therefore all the extra demand will be inflationary for your budget?

I am hearing a “maybe” in there, in terms of the inflationary demand of everyone buying simultaneously, but I guess that it is very difficult to predict. Ms Blackmore, you have dealt with the “very difficult to predict” by putting in contingency. This is your opportunity to tell the Committee about any other skeletons that you think you have in the defence procurement budget that mean you may need to go back to the Chief Secretary at a future date to say, “Actually, we were completely wrong on the inflation and the cost of these particular things.”

I think this discussion has drawn out—and the Committee recognises this—the fact that procurement in defence is very challenging. We are procuring a whole range of capabilities, many of which are cutting-edge or even bleeding-edge, that are being designed. As we mature those programmes we are, as Minister Pollard said, building more risk into some of those approaches, which may mean sometimes that we need to fail faster. From our perspective, as we build out this plan it is really important to build in contingency that feels reasonable. It is about that financial reset that we have spoken about, so that we are really assuring that the programme remains balanced and that we are clear about the effects we are trying to drive. We will be building that programme, always referring back to the strategic defence review, so that we understand it against that prioritisation of what we are trying to deliver. We have agreed the annual review that will set out where we are against that plan and how we might need to pivot, either because of financial pressure or because the technology has changed or the geopolitical construct has changed. It is really important that we are building a plan that enables us to pivot and that we are setting that out, to Parliament and to taxpayers as well, to say, “This is where we are as a Department,” to ensure that we have really tight fiscal discipline as guardians of a growing amount of GDP.

So no skeletons then.

I would love to be able to sit here and say, “I am confident there are no skeletons.” What I am really confident about is that we are improving our processes and that we are getting after the changes, whether that is about financial management or whether that is about how we procure faster and better, working with industry in a different way and supporting our suppliers. I really think we are driving some long overdue change that will set us up for success.

Thank you very much, at the end of a hot afternoon. There is so much more that we could go into, but no doubt you will be in front of the Defence Committee, Minister, soon and frequently. I don’t think they will let go of some of these issues. We wish you all the best in delivering on all these grand ambitions that are vital for the security of the country. We hope that the united front that you and the Chief Secretary have put forward in this room is indeed the case, because some of us have been around this block many times and seen that things do not always go as smoothly as presented in a Select Committee. We will keep a close eye on things from our different perspectives and with our sister Committee, the Public Accounts Committee. The uncorrected transcript of this sitting will be available on the website—thank you to our colleagues at Hansard—in the next couple of days. Thank you to our colleagues at Bow Tie for the broadcasting, and thank you to our witnesses from the Ministry of Defence and His Majesty’s Treasury.