13.1 | Resources

are doing). The MOD have been completely unable to explain what the additional

£650m this year is to be spent on.

“I know your instinct will be to back the MOD on this. But frankly I do not think they

have much of a case.”256

439. Mr Heywood provided an update on negotiations to Mr Blair on 10 October.257

Mr Brown had “grudgingly acquiesced” to provide an additional £250m in 2003/04

(and nothing for 2004/05 and 2005/06), “despite the rapidly deteriorating fiscal position”.

440. Mr Heywood concluded that providing an additional £350m to £375m for 2003/04

would be a reasonable compromise, with additional funding for the following years to

be considered after a review of the MOD’s financial controls.

441. Mr Blair met Mr Brown and Mr Hoon separately in mid‑October to discuss the

issue.258

442. Mr Hoon wrote to Mr Blair on 17 October, identifying the short‑ and medium‑term

consequences of the imposition of cash controls.259 Those included a reduction in

the preparedness of the military to conduct operations, cuts and delays in equipment

programmes, delays to planned pay increases, cuts in force structure, and a freeze on

recruitment in some areas. Mr Hoon argued that to avoid those consequences, he would

need authority to transfer more than the £400m “which is being suggested” for 2003/04,

and agreement now for similar levels of transfers in subsequent years.

443. Mr Heywood passed that letter to Mr Blair, advising that he had almost brokered

a deal between the MOD and the Treasury which involved:

• an additional £385m to £400m for the MOD in 2003/04;

• an external review of the MOD’s financial control systems; and

• a decision on funding in future years in the light of the findings of that review.260

444. Mr Heywood described that deal as “exceptionally generous”, given that the

Reserve was already fully spent and the UK was heading for a “massive fiscal

overshoot”. He concluded:

“I very much hope that you will endorse the compromise … This also means

overruling GB [Mr Brown]. He is currently refusing to countenance an offer of more

than £250m. But his officials know that that will not wash!”

256 Minute Heywood to Prime Minister, 7 October 2003, ‘MOD Spending’.

257 Minute Heywood to Prime Minister, 10 October 2003, ‘MOD Spending’.

258 Letter Heywood to Watkins, 21 October 2003, ‘Defence Budget’.

259 Minute Hoon to Blair, 17 October 2003, ‘Defence Budget’.

260 Minute Heywood to Prime Minister, 17 October 2003, ‘Defence Budget’.

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