The Report
of the Iraq Inquiry
410.
Mr Bruce
Mann, MOD Director General Financial Management from May 2001
to
February
2004, told the Inquiry that the MOD and the Treasury had worked
together for
many years
before 2002, better to understand that volatility.241
411.
By early April
2003, the Treasury had become concerned about the MOD’s
plans
to transfer
£1bn a year in 2003/04, 2004/05 and 2005/06 from non‑cash to
cash.242
That would
increase UK Public Sector Current Expenditure (PSCE) by the
same
amount,
which the Treasury judged to be unaffordable.
412.
The Treasury
acknowledged that the MOD should be able to redeploy
non‑cash
savings
released through genuine efficiency gains to cash, but was
concerned that:
•
the size of
the non‑cash savings had come “as a bolt from the
blue”;
•
the MOD had
over‑estimated its non‑cash costs (making it easier
subsequently
to identify
and claim savings); and
•
some
elements of the savings were due to “windfall gains or
creative
accounting”,
for example as the MOD changed the depreciation profiles
on
equipment
and wrote down the value of equipment.
413.
Sir Kevin
Tebbit warned Mr Hoon on 14 April that Treasury officials had
questioned
the planned
transfer of some £3bn from non‑cash to cash over the next three
years,
which they
regarded as undermining Mr Brown’s fiscal
projections.243
Treasury
officials
had said
that they could give no assurances that the MOD’s budget would not
be
reduced,
and had indicated that they would take account of the MOD’s
increased cash
spending in
deciding how to deal with “other issues in‑year”. Sir Kevin
described that as
“code for
our claims on the Reserve” in respect of operations in
Iraq.
414.
Sir Kevin
concluded that the MOD had acted in good faith within the terms of
the
2002
settlement, which allowed “unlimited flexibility to move funds
between separate
resource
and capital sub‑programmes”.
415.
Discussions
between MOD and Treasury officials continued through the
summer,
leading to
a reduction in the MOD’s planned transfer from £3bn to £2bn (£490m
in
2003/04,
£631m in 2004/05 and £948m in 2005/06).244
416.
A Treasury
official advised Mr Boateng on 19 August that he should
“rebut” the
MOD’s
entire £2bn transfer as neither legitimate nor affordable and
against the “whole
ethos of
RAB”:
“The big
picture is that the MOD have acted in bad faith. RAB sets out
guidelines
and
principles, but cannot cover every eventuality … Treasury is
ultimately
241
Public
hearing, 2 July 2010, page 63.
242
Minute
Dodds to Chief Secretary, 2 April 2003, ‘Draft: MOD Cash and
Non‑Cash Costs’.
243
Minute
Tebbit to Hoon, 14 April 2003, ‘Defence Budget’.
244
Email
Treasury [junior official] to Bowman, 4 July 2003, ‘MOD Budget –
Submission – DDI/Treasury
to CST’.
510