War bonds to lift defence spending ruled out
Sir Keir Starmer has ruled out issuing defence bonds to fund an uplift in spending as a spokesperson said it was “just another form of borrowing”.
In his absence at Prime Minister’s Questions, Starmer’s deputy David Lammy appeared to open the door to defence bonds being created to fund a rise in spending.
The Liberal Democrats’ Treasury spokesman Daisy Cooper asked whether the government was considering new defence bonds to add an extra £20bn to the budget for the armed forces over the next two years.
Lammy said he did believe that the country should work with allies to boost defence procurement and that it would “explore” multilateral agreements on funding.
The Prime Minister’s spokesman later clarified that the government would not follow the Liberal Democrats’ demands by issuing new defence bonds when asked.
“War bonds are just another form of borrowing,” he said, adding that the government was committed to “fiscal sustainability” and that defence-specific bonds risked being “more expensive” for taxpayers.
The statement draws a line under speculation around defence bonds, with John Healey appearing to back a new issuance scheme before resigning from the Cabinet.
In a letter to the Prime Minister, Healey said there were “credible ways” of raising defence spending from 2.6 per cent of GDP to three per cent by 2030 without cutting budgets across other government departments.
Healey’s call for borrowing rules to be relaxed would bring the UK more closely in line with Germany, which relaxed its fiscal framework to pay for a rapid increase in military spending.
Germany’s public debt as a share of GDP stands around 63.5 per cent compared to 94 per cent for the UK, where higher interest rates have also contributed to rising borrowing costs since 2022.
Starmer wrote back to Healey to condemn “irresponsible borrowing” proposals as he said that keeping public finances under control was also critical to national security.
Cooper told CityAM that Number 10 and the Treasury “have their heads buried firmly in the sand” over military spending.
She added that the government had already failed to gain access to the EU’s £130bn “Security Action for Europe” fund to provide low interest loans to member states for defence procurement, “a huge missed opportunity to bolster both UK industry and defence”.
“Defence bonds would kick-start the urgent regeneration of our Armed Forces – after being hollowed out by years of Conservative cuts – and could also generate much needed economic growth, particularly when targeted at research and development,” Cooper said.
“It’s beyond time Ministers got serious about funding Britain’s security.”
Defence spending debates deepen
The UK is exploring other agreements with Nato allies and EU countries to improve procurement for the armed forces.
Finland, the Netherlands and the UK have agreed to work on a defence financing agreement by 2027 while Healey and other defence officials have urged the government to explore joining Canada’s idea for a “Defence, Security and Resilience Bank (DSRB)”.
The Canadian High Commissioner to the UK recently said that Gordon Brown, who was appointed as an adviser to the Prime Minister on global finance matters, had discussed the bank’s creation with Canadian prime minister and former Bank of England governor Mark Carney.
It is hoped that the bank could direct low-cost lending to governments although Treasury officials have reportedly rejected Healey’s requests.
Other government advisers, including Starmer’s business adviser Varun Chandra, had reportedly urged the Treasury to consider a war bond scheme that granted inheritance tax relief to households investing in UK government bonds whose proceeds would be ringfenced for defence spending.
Some City analysts including Panmure Liberum’s Simon French and Deutsche Bank’s Sanjay Raja backed plans for the government to attract more British-based retail investors to buy bonds.