Reeves in talks over 'war bonds' to fund defence spending

Add Yahoo as a preferred source to see more of our stories on Google.

Rachel Reeves is considering issuing war bonds to fund increased defence spending, The Telegraph has learnt.

Members of the public and financial institutions would be able to buy bonds to raise money that would be ring-fenced for national security.

The Chancellor is reviewing whether this could solve the impasse over how to raise £17.6bn to meet the Government's pledge to increase defence spending to 3 per cent of GDP by 2029-2030.

John Healey, the Defence Secretary, is understood to be interested in the idea, which has been raised with him privately in recent weeks.

Issuing bonds would be less politically problematic than cutting the welfare budget to fund defence, which military chiefs and some Cabinet ministers have backed in recent weeks.

Sir Keir Starmer is under pressure to explain how his Government will achieve its flagship spending target amid mounting criticism over the state of the military.

Lord Hain, a Labour peer who was a Cabinet minister in the Brown and Blair governments, has argued that the Government should "promote extra borrowing solely for defence purposes by issuing a special purpose vehicle in the form of a defence bond up to set limits". He is understood to have raised the idea with both Ms Reeves and Sir Keir.

Writing for Labour List, he said that the Second World War provided a "useful precedent because fiscal rules were modified then for exceptional, and exceptionally dangerous, times".

He wrote: "Like today, Britain's initial hesitancy in the 1930s over the rising Nazi threat was partly because of the extra spending and borrowing that meeting it would entail.

"Formal commitments to rearm were only adopted in 1936 and ran well ahead of actual military preparations, like many Nato members' recent promises to raise the share of GDP they devote to defence."

The Treasury would hope that war bonds would raise money more cheaply than ordinary gilts by tapping into patriotism and strong market demand for defence investments.

Earlier this year, Sir Ed Davey, the Liberal Democrat leader, said the Government should start selling war bonds as there was a need to "move far faster" on UK defence spending.

Under his party's plan, members of the public could loan the Government money in the form of a bond which would run over a two- to three-year period and pay out the same interest as standard government bonds.

Sir Ed said the bonds, which the party says could raise up to £20bn for the military, would give the public a chance to "support patriotically our defence".

Treasury officials believe that issuing special defence bonds would not break any of the Chancellor's fiscal rules.

She has said she is against raising taxes or borrowing more to meet Labour's pledge, and ruled out changes to the triple lock on pensions to fund higher defence spending.

Last week, a major row broke out after Lord Robertson of Port Ellen, one of the authors of Labour's strategic defence review, said the military could not be properly funded with an "ever-expanding welfare budget".

Sir Keir had promised to publish his defence investment plan for military spending over the next decade six months ago, but it has still not been released amid wrangling between the Ministry of Defence and the Treasury.

The delay prompted Lord Robertson, a former head of Nato and Labour defence secretary, to accuse Sir Keir of putting the nation in peril.

Amid the row, Wes Streeting, the Health Secretary, became the first Cabinet minister to openly back calls to cut the welfare budget to fund defence spending, in an apparent break with Downing Street.

But Sir Keir is unlikely to do this given he suffered a backbench rebellion the last time he tried to slash the benefits bill which led to a government about-turn and significant blow to his authority.

New alliance with academia

Meanwhile, ministers are preparing to launch a new Defence Universities Alliance, under which universities will be asked to publicly commit to support and work with the defence industry.

Applications open on Sunday for institutions to become founding members of the alliance, which officials believe will "fundamentally reshape the relationship between British academia and national defence".

Ministers say the initiative is part of a broader "whole of society" shift in how the UK approaches defence, saying this will be "one that moves beyond government alone and brings in communities, industry, financial services and academia".

A Government spokesman said: "We are delivering the largest sustained defence spending increase since the Cold War - 2.6 per cent of GDP from 2027 - with an additional £5bn for defence this financial year alone, and £270bn investment across this parliament, ensuring no return to the hollowed-out Armed Forces of the past.

"The Government keeps the introduction of new debt instruments under constant review, but would need to be satisfied that any new instrument would meet value-for-money criteria, enjoy strong and sustained demand in the long term, and be consistent with wider fiscal objectives."