Labour blamed for £3.3bn 'black hole'

The National Audit Office (NAO) blamed a failure to set "realistic" budgets, resulting in a "mismatch" between the MoD's planned expenditure and its forecast funding by the Treasury.

Defence Secretary Liam Fox said the cost over-runs were "the direct result of the incompetence of ministers" in the former government.

The increase in costs was almost entirely down to two programmes – the RAF's Typhoon fighter jets, which rose by 2.7bn, and the Royal Navy's two planned new aircraft carriers, which went up by 650m.

The future of the carriers, which are now forecast to cost 5.9bn, has been a key issue in the Government's Strategic Defence and Security Review – due to be published next week.

The in-year cost increase contributed to what Ministers say is a 38bn "black hole" in the equipment programme which has left them scrabbling to find major spending cuts.

The NAO said the increase in the cost of the Typhoons was down to a decision to buy 16 additional aircraft in order to meet the UK's contractual obligations under the four-nation Eurofighter programme with Germany, Italy and Spain.

It said that in 2004, the MoD had withdrawn the remaining 978m it had for the third and final tranche of aircraft, even though it knew it was likely to be faced with further "significant" costs.

The rise in the cost of the carriers was due to the decision in 2008 to slow down the programme in order to spread the spending over a longer period.

Dr Fox said that the report showed that the MoD had been "living beyond its means for too long" and that he was determined to get its costs back under control.