The Chancellor Rachel Reeves is reported to be considering proposals to issue war bonds to fund a splurge in defence spending. We have been here before when it comes to the Labour government suggesting that it is willing to put its money where its mouth is on defence.
Only 14 months ago, Sir Keir Starmer seemed to have seized the initiative when he announced that the government would not only fulfil but accelerate its manifesto commitment to spend 2.5 per cent of GDP on defence. That was brought forward to 2027, while he ‘set a clear ambition’ to go further to 3 per cent of GDP ‘in the next parliament’. But what seemed like a bold act of leadership is now much diminished as other Nato member states have made greater commitments to defence. The latest annual report from the alliance’s Secretary General, Mark Rutte, sees the United Kingdom languishing in the midfield. Our current rate of defence spending puts the UK only 14th of 31 Nato members (Iceland has no standing armed forces).
This is not just a matter of comparison and competition to establish bragging rights at Nato summits. Again and again, we have seen clear evidence that current levels of defence spending are inadequate. When RAF Akrotiri in Cyprus was attacked by Iranian or Iranian-proxy drones at the beginning of March, there were no British naval assets in the region. Due to maintenance and repair backlogs and overstretch, only one of the Royal Navy’s six sophisticated Type 45 destroyers, HMS Dragon, was available for deployment. it took three weeks for her to arrive on station in the eastern Mediterranean. Entire wars have lasted for a shorter period.
The defect we have to rectify is long-term systemic underinvestment in defence
The most pressing expenditure problem is that the armed forces are facing a shortfall of something like £28 billion over the next four years between current spending and operations commitments over existing resources. The Chancellor of the Exchequer, Rachel Reeves, will not countenance more than an increase of just under £10 billion, unwilling to break her ‘fiscal rules’. However, she is now said to be considering the idea of government-issued ‘war bonds’ to raise enough money to fill the outstanding £18 billion gap.
The bond idea is not new. The Liberal Democrats have been promoting the scheme since the beginning of this year, and it has been in the ether for longer as one of a range of innovative ways of accessing more money for the armed forces. It is relatively straightforward: members of the public and institutional investors could buy a two- or three-year bond which would offer a return similar to standard government bonds – currently between 4 and 5 per cent – but the investment would be ring-fenced for defence spending.
This scheme is attractive to ministers because it would, to an extent, be off-book and would not represent increased taxation or general government borrowing. It would allow the government to avoid being forced to make unpopular expenditure cuts elsewhere like the welfare budget.
‘War bonds’, or however the government chose to label them, are not a bad idea. If the public can be persuaded to invest in defence by voluntarily lending money to the government – which is effectively what a bond is – and if that could generate something of the order of £20 billion for the armed forces, it is welcome. But we have to be clear that it would mitigate rather than solve the current spending strictures.
The British government began issuing ‘war loans’ at the beginning of the first world war when the Chancellor, David Lloyd George, used the Currency and Bank Notes Act 1914 to issue paper banknotes not backed by gold. His successor, Andrew Bonar Law, extended the scheme for a third war loan in January 1917. In both world wars, the government also made use of the public National Savings Movement, founded in 1916, to help finance its spending deficit.
The difference from today’s circumstances is that in the first and second world wars, increased expenditure was being supported on a temporary basis (albeit of uncertain duration) for a specific purpose: to fight an open, declared war. It is true, however, that we are now facing a geopolitical situation which cannot be called ‘peace’, and some of our adversaries, like Russia and Iran, have carried out hostile acts against the UK, British citizens and British interests.
The defect we have to rectify, however, is long-term systemic underinvestment in defence. There is a danger that the Treasury embraces war bonds as a politically convenient measure to overcome a shortfall between now and 2030, but that is not the problem. The armed forces do not need a brief boost of investment: 3 per cent of GDP, 3.5 per cent or more must become the new normal, not just to rebuild the armed forces with the capabilities, personnel and equipment to meet our national security needs but to sustain them at that increased level for the foreseeable future.
This government has spent nearly two years frantically gaslighting the electorate by reassuring voters that our armed forces are capable of what is required of them (they are not). All while intoning the irrelevant mantra of (say it with me) ‘the biggest sustained increase in defence spending since the Cold War’.
The first step towards recovery is admitting you have a problem. This is something the government has been unable to do. Instead, they have engaged in evasion, outright denial and the jam-tomorrow promises of more defence spending to come. There is a danger that war bonds will be seen in Whitehall as ‘free money’, the immediate spending crisis will pass and a collective sigh of relief will go up. That is not enough.
War bonds may be a useful instrument to augment defence expenditure, and on that basis they are welcome. But they are a sticking plaster. The armed forces need substantially more investment on what we should regard as a permanent basis. Otherwise there will be only one outcome: Britain will go on failing to protect our national security and interests and failing in our commitments to our allies. There is no ‘Third Way’.
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