John Healey considers defence bonds to fund Britain’s military spending boost

Two former Tory defence secretaries have backed using defence bonds to raise the funds needed to boost spending for the UK’s military and security, which The Independent understands is under consideration by new chancellor John Healey.

A senior source who worked with Mr Healey to try to raise extra money for defence before he quit Sir Keir Starmer’s government has said the chancellor is considering a bid to join a new Canada-led global banking scheme, which would allow it to find cheaper ways to finance defence projects.

Mr Healey resigned as defence secretary in June over a failure to meet the requirements in defence spending, claiming the package was £13bn short of what was required meaning the armed forces could not keep Britain safe. It later emerged another £4.7bn of the £15bn plan was unfunded.

But with available money to pay for the new government’s priorities in short supply and Mr Burnham saying he will stick to Labour’s manifesto pledge not to raise income tax, VAT or national insurance, Mr Healey has arrived in the Treasury with few options on how to find an extra £18bn for defence.

The Independent understands Mr Healey wanted to join Canadian prime minister Mark Carney’s Global Defence Bank to raise bonds, but he was blocked by the then-chancellor Rachel Reeves, who was concerned that it would breach her tight borrowing rules.

Now he has replaced Ms Reeves in No 11, he is believed to be trying to revive the bid.

The senior source said: “Mark Carney is not exactly a novice, he was the governor of the Bank of England, this was always a good way of raising funds for defence.

“We argued and argued for defence bonds through the bank but Reeves was completely cloth eared and would not even engage in the discussion.

“John Healey intends to pursue this idea, he wants to raise the money that we need for defence because he knows better than anyone that it is not a luxury, it is absolutely necessary.”

They added: “The Canadians were incredibly frustrated as well. They kept on reaching out to Reeves to try to get our involvement in the bank but she just would not listen.”

The proposal has the conditional backing of two former defence secretaries. Sir Gavin Williamson told The Independent: “We should be looking at all opportunities to see how we can get more money into defence and making sure that our armed forces have the very best. I would hope as chancellor of the Exchequer John will be willing to explore that idea as he was keen to do as defence secretary.”

Sir Malcolm Rifkind, who was Tory defence secretary between 1992 and 1995, said it “sounds like a good idea”.

“In any event we are being told that HMG have ruled them out,” he added. “Nothing is absolute now that Healey and not Reeves is chancellor.”

Currently nine countries – Canada, Albania, Belgium, Greece, Latvia, Luxembourg, Romania, Turkey and Ukraine – have signed up to the bank.

According to the i Paper, membership for the UK would cost around £870m for three years, but offers the option of pooling resources of member nations to finance defence companies, which would in turn allow members to indirectly fund military spending.

The plan for the UK to follow comes as Mr Burnham has pledged to stand by Ms Reeves’ fiscal rules on borrowing, but said he intends to use the flexibility within them to the maximum.

There is nervousness in the markets that the UK could end up borrowing too much under a more leftwing government.

At the time, Ms Reeves rejected the idea of defence bonds because she warned that it was “just another form of borrowing” under a different name after the proposal was publicly championed by the Lib Dems.

The proposal has been met with scepticism by some leading economists.

However, Stephen Millard, deputy director for macroeconomics at NIESR, warned: “I suspect the UK would be a net contributor to the bank and so would not gain much. And I’d be surprised if the bank were able to lend to the UK government at a rate lower than we see on gilts anyway. So I think this is a scheme aimed more at helping smaller countries obtain cheaper funding for defence rather than large countries such as the UK.”

Meanwhile, new defence secretary Wes Streeting has said he wants to make sure "every penny is spent wisely", adding investment in the armed forces must come with "modernisation".

Mr Streeting insisted that he wants to follow the same "mantra" he had while health secretary, arguing this saw him "maximising value for money and cutting waste" after securing billions of pounds of extra funding for the NHS.

Speaking at the Farnborough International Airshow, Mr Streeting said his aim is to make the UK a "strong, dependable ally" while also supporting jobs at home.

The last government under Sir Keir raised defence spending by £15bn but there were still concerns that they would fail to meet the 3 per cent of GDP target by 2030.