The National Audit Office (NAO) said the risks to the affordability of the ten-year plan were greater than at any point since its introduction in 2012.
The projected cost of funding the plan rose to £178bn last year – an increase of 7 per cent compared to a rise of just 1.2 per cent between 2013 and 2015.
A large part of the increase was due to the £24.4bn of additional commitments announced in the 2015 Strategic Defence and Security Review (SDSR) including the army’s mechanised infantry vehicle and the Poseidon maritime patrol aircraft.
Meeting the cost will absorb all of the £10.7bn “headroom” built into the plan to meet emerging new requirements and require additional savings of £5.6bn over the next ten years.
Around £1.5bn will come from savings elsewhere in the defence budget – such as military and civilian pay restraint or reducing the running costs of the defence estate.
On top of that, the NAO warned the MoD had yet to generate £2.5bn of the £7.1bn savings already factored into the plan.
The NAO also disclosed that the MoD’s independent cost assurance and analysis service had calculated that the financial risk to the plan was being underestimated by £4.8 bn.
While this was still within the £5.3bn contingency provision, the NAO said it did not cover the estimates for the new SDSR commitments.
In addition, with £18.6bn of the plan to be paid for in US dollars and £2.6bn in euros, the costings were vulnerable to further fluctuations in the value of sterling.
The head of the NAO, Sir Amyas Morse, said: “The affordability of the equipment plan is at greater risk than at any time since its inception. It is worrying to see that the costs of the new commitments arising from the review considerably exceed the net increase in funding for the plan. There is little room for unplanned cost growth and the MoD must actively guard against the risk of a return to previous practice where affordability could only be maintained by delaying or reducing the scope of projects.”
Defence procurement minister Harriett Baldwin said the government was committed to delivering “the best kit for our armed forces at the best value for the taxpayer”.