View from the House - David Walker

It sounds exaggerated, but we belong to a state at war. Normal business goes on pretty much as usual. The perturbations are as evident on the right as on the left, so William Hague has no room for manoeuvre and Tony Blair soars even higher in the polls. Yet down in the bowels of Whitehall some agitated calculations are being made.

War in the Balkans is starting to cost real money. And the peace – if and when it comes – may be even more expensive, raising the prospect of severe havoc being wrought on Gordon Brown’s best-laid plans.

Before the first bombs fell, the Ministry of Defence got its retaliation in first. It appealed to Her Majesty’s Treasury for a slice of the contingency reserve – #200m was the first bid. The reserve officially totals about #2bn – money not allocated to departments in the comprehensive spending review last summer – but a glance at the government’s ‘Red Book’ shows opportunity aplenty for some creative accounting, and it may be needed. Commitments in the Balkans are open-ended. The air sorties and ground forces cost extra; although the MoD would have been paying for HMS Invincible when it was in the Persian Gulf, and sending it to the Adriatic won’t itself push costs up a huge amount, while a parachute brigade costs almost as much on standby in Westphalia as it does in Albania. Then there’s Britain’s contribution to incremental spending by NATO, which operates on an automatic formula. In the long run, reconstruction in the war-torn region will be much more expensive. Talk about a ‘Marshall plan’ for south-east Europe is in the air. Given the rate of physical destruction south of the Danube, that’s going to involve many, many billions.

So far the Treasury is playing it cool. Once the contingency reserve is exhausted, the government would at first aim to borrow more rather than cut into domestic spending. A benign scenario is being played with, too.

If the conflict ended soon, and the British economy continued to ‘land softly’, most of the Balkan spending would be paid for from increased tax revenues. The government’s economic luck has held so far: if it doesn’t, this war will come home with a vengeance. David Walker writes for The Guardian