Downing Street Plans to Revive War Bonds Idea
Downing Street aides are preparing to lobby Andy Burnham during access talks to revive the concept of “war bonds” as a means to finance increased defence spending once he assumes the role of prime minister, has learned.
Senior figures at No 10 aim to persuade the Treasury to permit greater borrowing for military expenditure and will seek to convince Burnham to allocate funds exceeding the £13.5bn designated for the long-anticipated Defence Investment Plan (Dip).
Defence aides reportedly visited Makerfield during the recent by-election campaign to update Burnham’s team on the current status of the UK’s diminished defence capabilities.
Although Burnham is expected to enter Downing Street with the Dip already approved, he is anticipated to face significant pressure from military leaders and government officials to increase defence spending over the long term.
Labour Leadership and Defence Investment Plan
Keir Starmer confirmed on Wednesday that he would announce the Dip before the NATO summit in Ankara on 7 and 8 July, despite stepping down the following week. No 10 officials argue that while the Dip represents a substantial spending commitment, it is an existing one.
However, Starmer has encountered criticism from some Labour MPs for advancing such a critical policy issue instead of deferring it to his likely successor, who has expressed intentions to provide the Ministry of Defence (MoD) with funding beyond the £13.5bn currently proposed.
Allies of Burnham indicate that if the dispute over defence spending is resolved by the time he takes office—amid indications that the Treasury and military leaders have accepted the settlement—he would likely proceed without changes.
Nonetheless, his team reserves the right to revisit the Dip if unresolved issues remain, such as investments in tanks and other concerns raised by the defence establishment.
His aides are believed to have engaged in discussions with John Healey, who recently challenged Starmer’s leadership, asserting that the Dip falls significantly short of the required funding.
Military Leadership Calls for Enhanced Defence Funding
On Wednesday, the head of the armed forces, Air Chief Marshal Sir Richard Knighton, emphasized the necessity for Britain to finance capable armed forces able to confront Russia and beyond. He warned that if deterrence fails, an all-out war would be far more costly.
“The UK needs armed forces that our adversaries are scared of,” Knighton stated at a conference hosted by the Royal United Services Institute.
Highlighting the importance of investment, Knighton noted that British defence spending increased dramatically from 2.9% of GDP in 1936, to 9% in 1939, and then to 52% in 1945, far exceeding the target of 2.7% of GDP planned for next year, despite the low likelihood of all-out war.
War Bonds and Treasury Resistance
With Starmer authorizing access talks, No 10 sources revealed plans to use these discussions to encourage Burnham to reconsider the issuance of war bonds, a proposal consistently opposed by the Treasury due to concerns about increased borrowing.
The government had previously approached the idea of issuing war bonds to fund higher defence spending. understands that Morgan McSweeney, Starmer’s former chief of staff, had advocated for them before his departure, but the Treasury rejected the plan.
Under proposals developed at No 10 and supported by Starmer’s business adviser Varun Chandra, the government would have issued up to £20bn in bonds exempt from inheritance tax.
The funds raised would be exclusively allocated to defence spending—a restriction the Treasury has historically resisted. Advocates argue that the tax advantages would enable the government to pay lower interest rates, reducing overall borrowing costs.
They also contend that such bonds would attract domestic individual investors, a group whose participation has diminished in recent years as large hedge funds have become dominant creditors.
Some government officials believe that increased domestic ownership of bonds would reduce public borrowing costs, as hedge funds are more prone to sell gilts in response to minor market fluctuations.
Support for Defence Security and Resilience Bank
Several Labour MPs have urged the UK to support the Defence Security and Resilience Bank initiative, led by Canada. Countries are being invited to endorse the scheme at the NATO summit next month, although the Treasury opposed the initiative when Healey supported it during his time in government.
Alex Baker, a member of the defence select committee, recently wrote that the bank, which would specialize in lending to small defence companies, would “turn political commitments into industrial output” and “create the conditions for more factories, jobs, exports, innovation and resilient supply chains.”
Proponents argue that a UK subscription of £900m would grant access to a bank with €100bn (£86bn) in lending capacity. Earlier this week, Chancellor Rachel Reeves stated she was in discussions with Canada and was also developing a “multilateral defence mechanism” involving off-balance-sheet financing with Finland and the Netherlands.
Cabinet Discussions and Budget Reallocations
During a cabinet meeting on Tuesday, Starmer instructed his ministers to “resolve difficult issues” in his remaining weeks in office to facilitate a smooth transition, including publishing the Dip, which has been delayed due to funding disputes among No 10, the Treasury, and the MoD.
Dan Jarvis, the new defence secretary, has indicated he is already seeking additional funding and described his involvement in “very good and constructive” discussions. Other government departments have been asked to reduce their budgets to enable Starmer to reallocate funds.
