Boris Johnson’s hopes of regaining the political initiative by setting out a three-year spending master plan for the rest of the parliament have been abandoned.
The Treasury confirmed on Wednesday that the proposed three-year comprehensive spending review had been scrapped in favour of a one-year review because of the economic chaos caused by Covid-19.
“While the government would have liked to outline plans for the rest of this parliament, the right thing today is to focus entirely on the response to Covid-19 and supporting jobs — that’s what the public would expect,” the Treasury said.
Instead of setting out departmental spending plans for three years, Rishi Sunak, chancellor, will focus on a one-year package to support employment and help public services cope with the pandemic, as revealed on Tuesday by the Financial Times.
Mr Sunak confirmed some areas of public spending “crucial to our economic recovery” would have longer term settlements.
The chancellor told the prime minister that a comprehensive review — setting out spending totals across Whitehall — should not go ahead during the coronavirus crisis.
The issue has created tensions between Mr Sunak and Mr Johnson, and intensive negotiations have been going on over the past week — including on Tuesday night — on whether any compromise could be found.
A decision to scrap the three-year review is a setback for Mr Johnson, who saw the event as a chance to map out his priorities for a post-Covid world.
It will also be a disappointment for defence chiefs, who wanted certainty on how to plan for a new era of changing threats against the backdrop of tight budgetary constraints.
One option would be to publish the separate “integrated review” of defence and foreign policy — setting out the UK’s priorities — without fixing a multiyear defence budget.
Last month Mr Sunak was forced to scrap plans for an autumn Budget, also because a resurgence of coronavirus had thrown economic planning into chaos.
One person briefed on the talks said: “You could have a one-year ‘health and prosperity’ focused spending review. But it’s a disaster for the military who are already running billions short of cash.”
Launching the integrated review in February, Mr Johnson called it the biggest analysis of the UK’s defence policy since the end of the cold war, promising it would set a new strategy for “global Britain” while revolutionising procurement.
The MoD, which is grappling with a £13bn shortfall in its equipment budget, is agitating for a multiyear financial settlement alongside the review that would rebalance its spending commitments and allow for military modernisation to take the armed forces into a new era of technological warfare.
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Service chiefs are keen for political leaders to sign off a costed plan that would retire some traditional equipment to allow investment in autonomous ships, drones and cyber defences.
Defence officials say they need to be able to budget for the long term. “Without this certainty, you lose all the longer term financial planning that will put us at a strategic advantage,” one defence official said.
Publishing a high-level version of the integrated review even without spending plans would allow Downing Street to articulate a clear post-Brexit foreign policy at a time of significant international uncertainty. The Covid-19 pandemic, growing espionage threat from hostile powers and rising tempo of cyber attacks that fall below the threshold of formal armed conflict have all increased the risks to UK security, say defence and intelligence officials.
Aerospace and aviation executives have been lobbying government for a dedicated support package to survive what will be a difficult winter and to help the industry meet the target of net zero carbon emissions by 2050.
France and Germany have bailed out their national airlines, and announced longer term multibillion-euro aid packages for the development of electric and hydrogen technology.
Meanwhile, the UK has not provided any sector-specific support, prompting fears that British companies will lose competitiveness at a time when aircraft technology is changing rapidly. The UK has already slipped from having the second biggest share of the global aerospace market to third place behind France.
The MoD put its bids into the Treasury 10 days ago and is in tense negotiations on the terms of its deal. Ministers privately have made clear that since defence equipment plans can last anywhere between a year and 25 years, a multiyear settlement is crucial for procurement and effective planning.
One industry executive involved in talks with ministers on an economic recovery plan said: “The problem with delaying [the spending review] is that it will completely stall any of the midterm investments that will enable business to recover.” Those could include some of Mr Johnson’s longer term green energy plans.
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