Liam Fox letter exploits climate of rumour

The leak is part of a wider political problem the spending review poses. But I expect a happy ending for the MoD and Treasury

David Cameron and Liam Fox in Afghanistan in 2009. A leaked letter to the PM reveals the defence secretary's displeasure at the prospect of 'draconian' cuts Photograph: Stefan Rousseau/AFP/Getty Images

Wednesday 29 September 2010 10.59 EDT
First published on Wednesday 29 September 2010 10.59 EDT

The leak of the letter from Liam Fox to David Cameron is bad news for the government. The defence review has been prone to leaks, off-the-record briefings and a great deal of speculation. It has allowed the media to paint a portrait of a big battle between the Treasury and the Ministry of Defence, with the three main services keen to make their points and keep their places at the table.

The rest of us watch as the arguments rage. We remain uninformed of the actual amounts of money being discussed for the current and capital budgets. The only figures we see are large ones for cuts, based on the claimed need to cut procurement from the expensive and unaffordable plans handed down by the previous government.

It is part of a much wider political problem that the spending review has posed. The government has allowed a long period to elapse over the summer when rumours circulated of large and sometimes unacceptable cuts in various budgets. The government itself cannot deny these stories, and will not know the outcome until 20 October, when the chancellor tells the Commons the outcome of the review.

This allows the opposition to claim that the Tories are just interested in deep and damaging cuts. It allows many working in public service to campaign vigorously to keep spending programmes that may or may not face any real threat. It gives the unions ammunition to plan a campaign of action against changes they do not like.

The whole debate is curious, given the figures published in George Osborne's budget statement for future public spending, which show steady cash growth in each year for five years. If price and wage inflation is below the 2% target, the figures allow modest real growth every year. Allowing the rumours to run around that we are facing cuts of 25% or more in important programmes is far from helpful, and must be wrong on the numbers that we have seen published.

It is true that debt interest will rise as the borrowing continues, but even here the government has the advantage that its attitude to deficit reduction has already cut the cost of new government borrowing by reassuring the markets. And all departments are being asked to cut their overheads by 30%, which will take a lot of the pressure off the front line, including defence.

Judging by the tone of Fox's letter he believes he does face serious reductions in the defence budget. He is right to press hard in private for the best deal possible, and right to warn if there is a danger of defence getting too little for the years ahead. He was always going to have bigger problems, as the capital budget to buy new equipment has been squeezed before, and there are numerous important programmes left for the new government to find money to buy. They will not all be affordable in the next five years.

I expect the defence department and the Treasury to reach an agreement nearer the deadline, probably with the steadying hand of the prime minister helping. The defence budget is already one of the smaller ones around Whitehall, and I find it difficult to believe this government would want to end up with a budget that damaged the UK's services or our ability to defend ourselves and our interests around the world. It may be that the early runs have been too tough on defence. This letter and meetings that follow may result in more money being found.

My guess is there will be a happy ending for all the main protagonists. It would be a bad mistake for the Treasury to push Fox over the edge, and a bad mistake for Fox to refuse to make sensible economies in a department that has its own inefficiencies.