Senior UK government officials, including some in No 10, are planning to lobby Andy Burnham during access talks to revive the idea of “war bonds” to pay for higher defence spending when he becomes prime minister, the Guardian understands. The push comes as military leaders and government figures pressure Burnham to invest beyond the £13.5bn earmarked for the long-awaited Defence Investment Plan (Dip).
Background and Pressure for Higher Spending
Defence aides have reportedly travelled to Makerfield during the byelection campaign to brief Burnham’s team on the state of the UK’s depleted defence capabilities. Although Burnham is expected to enter Downing Street with the Dip already signed off, he will face heavy pressure from military leaders and others within the government to increase defence spending in the long term.
Keir Starmer confirmed on Wednesday he would announce the Dip before the Nato summit in Ankara on 7 and 8 July, despite leaving office the following week. No 10 argues that while it is a big spending commitment, it is an existing one. However, Starmer has faced criticism from some Labour MPs for pressing ahead with such an important policy issue rather than leaving it to his likely successor, who has indicated he wants to give the Ministry of Defence (MoD) more than the £13.5bn on offer.
Burnham’s Position and Potential Reopening of Dip
Burnham’s allies say that if the row over defence spending has been resolved by the time he takes over—amid signs that a little extra money has been found and the settlement accepted by military leaders—then he would probably just move on. However, his team is reserving the right to reopen the Dip if that is not the case, for example, if mismanaged programmes such as tanks investment remain unaddressed and the concerns of the defence establishment unallayed.
Burnham is believed to have held discussions with John Healey at the likely next prime minister’s request. Healey pushed Starmer’s premiership to the brink when he quit as defence secretary earlier this week, arguing the Dip fell well short of what was required.
Military Leaders’ Warnings
On Wednesday, the head of the armed forces, air chief marshal Sir Richard Knighton, said that Britain needs to fund capable armed forces that can go “toe to toe with Russia” and beyond, because if deterrence were to fail, an all out war would be more costly. Emphasising the need for investment, Knighton said at a conference organised by the Royal United Services Institute that the UK needed “armed forces that our adversaries are scared of.”
Knighton highlighted the historical scale of defence spending: British defence spending “went from 2.9% in 1936, to 9% in 1939, to 52% of GDP in 1945,” dramatically beyond the target spend of 2.7% of GDP next year, even though few believe all out war is likely.
War Bonds Proposal and Treasury Opposition
With Starmer giving the green light to access talks, No 10 sources said they would use them to encourage Burnham to reconsider defence bonds, which have consistently been blocked by the Treasury amid warnings over the impact of higher borrowing. The government had come close to issuing war bonds to pay for higher defence spending before. The Guardian understands that Morgan McSweeney, Starmer’s former chief of staff, had started pushing for them before he quit, but the plan was rejected by the Treasury.
Under the plans drawn up in No 10 and championed by Starmer’s business adviser Varun Chandra, the government would have issued up to £20bn of bonds which would have been exempt from inheritance tax. The money raised would only be used to pay for defence spending—a limitation the Treasury has always resisted in the past. Because there would be a tax benefit to owning them, advocates of the idea believe the government would have had to pay a lower interest rate, helping bring down its overall cost of borrowing. They also say it would have encouraged domestic individual investors to buy bonds, something that has faded in recent years as large hedge funds have become an increasingly important source of credit. Some in government believe the UK would be paying less for public borrowing if more domestic investors owned bonds, as they believe hedge funds are more likely to sell gilts because of small fluctuations in the market.
Alternative Proposals and Treasury Response
Other Labour MPs have pressed for the UK to back the Defence Security and Resilience Bank initiative, led by Canada. Countries are being asked to sign up at the Nato summit next month, but the scheme supported by Healey when he was in government was opposed by the Treasury. Alex Baker, a member of the defence select committee, said in a recent article that the bank, which would specialise in lending to small defence companies, would “turn political commitments into industrial output” and that it would “create the conditions for more factories, jobs, exports, innovation and resilient supply chains.” Proponents argue that for a UK subscription of £900m, the UK would gain access to a bank with €100bn (£86bn) of lending capability.
Earlier this week, Rachel Reeves, the chancellor, said she was talking to Canada—but also developing a “multilateral defence mechanism” of off balance sheet financing with Finland and the Netherlands. During a cabinet meeting on Tuesday, Starmer told his ministers he wanted to “resolve difficult issues” in his remaining weeks in office to help with the transition, including publishing the Dip which has been delayed over funding disputes between No 10, the Treasury and the MoD. Dan Jarvis, the new defence secretary, has signalled he is already looking for more funding and said he was involved in “very good and constructive” discussions. Other departments have been asked to make cuts to their budgets to allow Starmer to reallocate funds.
