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George Osborne settles defence budget ahead of Spending Review

A deal was done between the Chancellor and the Defence Secretary to settle the Ministry of Defence's budget for 2015-16 late on Saturday night.

George Osborne. Photograph: Getty Images

The Ministry of Defence budget for 2015-16 has been agreed ahead of the Spending Review, George Osborne has said.

Speaking on the BBC's Andrew Marr Show this morning, he told stand-in presenter Sophie Raworth that the deal was done "last night" and defended how close to the wire these decisions are being made, saying that "in the past these things were often done the night before the spending round." To stick to his own economic plan, the Chancellor must announce £11.5bn of Whitehall cuts to Parliament on Wednesday.

The cuts agreed to by the MoD will result in the civilian headcount being reduced while the armed forces remain at the same level, BBC Political Editor Nick Robinson reported. Osborne has also said that the fines from the Libor bank interest rate-fixing scandal will go to schemes to benefit war veterans and their families.

Further complications became apparent this morning as seven former defence chiefs published a letter in the Observer, calling on the Prime Minister to resist pressure from the MoD to allow the military to dip into the aid budget to make up shortfalls elsewhere. They describe the ring-fenced aid budget as "critical to the UK's national interests".

Agreeing the cuts to the defence budget was a major hurdle for the Treasury to clear ahead of the Spending Review - as my colleague George Eaton wrote back in February, the idea that the MoD must find cuts while the aid budget remains ringfenced was a difficult pill to swallow for many Conservative MPs.

However, defence is not the last department to settle - Vince Cable's Department of Business, Innovation and Skills is still holding out. On the Marr Show, Osborne claimed that he and Cable were still "arguing about the small details" but denied that there was a "massive argument" going on with his Lib Dem cabinet colleague.

That isn't quite the story coming out of the Cable camp, however - the Observer reports today that the Business Secretary was in "no mood to back down in a dispute he regards as crucial to the government's economic credibility". The problem, it is suggested, is that the differences between Vince Cable and the Treasury run deeper than just quibbles over a few numbers here or there. Cable insists the coalition needs "a strong story to tell on growth" as well as emphasis on the necessity to cut. In accordance with this, he is reportedly pushing for investment in science, skills and training.

This is not a new direction for Cable. In an essay for the New Statesman in March 2013 entitled "When the facts change, should I change my mind?", he set out his hesitations with the coalition's economic policy, particularly in the area of growth and capital spending. He wrote:

The more controversial question is whether the government should not switch but should borrow more, at current very low interest rates, in order to finance more capital spending: building of schools and colleges; small road and rail projects; more prudential borrowing by councils for housebuilding.

Osborne is expected to put some emphasis on infrastructure spending in Wednesday's Spending Review, but Cable seems to be holding out for specific investment for his own department.

Exactly when, and how, Cable and Osborne will be able to resolve what appear to be fundamental intellectual differences, remains to be seen.