Healey warned ‘our enemies are not going to wait’ as Britain’s defence crisis explodes ahead of Budget

Chancellor plans to channel long-term borrowing through the National Wealth Fund and British Business Bank to finance defence companies, create jobs and strengthen Britain’s military industry — but faces demands to reveal a fully funded route to higher defence spending.

John Healey is preparing to announce billions of pounds in defence-related investment in Wednesday’s Budget, as the Chancellor faces mounting pressure to explain how Britain will pay for the military expansion he previously demanded from the Government.

The plans will see money channelled into the National Wealth Fund and British Business Bank, two publicly backed financial institutions that can invest in British defence businesses, including companies developing military technology and equipment.

The investment is intended to stimulate domestic industry, support jobs and strengthen the UK’s defence manufacturing base. According to The Times, the funding will serve as a “down payment” on Mr Healey’s ambition to raise defence spending to 3 per cent of gross domestic product by 2030.

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But the announcement is already raising questions about whether the proposed investment represents a meaningful step towards meeting Britain’s military spending commitments — or risks becoming a substitute for the clear timetable and sustained funding that critics say the armed forces urgently need.

The Chancellor is under particular pressure because he previously set the 3 per cent target himself and left Sir Keir Starmer’s Cabinet after arguing that the Government was unwilling to commit the resources required to defend the country amid rising international threats.

The Budget will therefore offer an early test of whether Mr Healey can turn that ambition into a credible funding plan.

Borrowing loophole offers route to defence investment

The proposed funding will rely on long-term borrowing, but the Government expects the investment to remain within its fiscal rules because the money will be deployed through public financial institutions with the potential to generate returns.

One of the Treasury’s fiscal rules requires public debt to fall as a share of GDP within three years. However, the framework allows for borrowing to support investment in public financial institutions where the money is expected to produce a financial return.

Such institutions, known as public financial institutions or “PuFins”, are treated differently from conventional government spending in the Treasury’s fiscal calculations. Investment through them would not appear on the Treasury’s Budget scorecard in the same way as direct departmental expenditure.

The mechanism offers ministers a route to support defence businesses without the same immediate accounting consequences as additional day-to-day spending.

It also raises a distinction at the heart of the announcement: investment in companies that supply the armed forces can strengthen Britain’s industrial capacity, but it does not automatically provide the funding needed to pay for personnel, operations, equipment procurement and other core military requirements.

The Government will therefore face questions over how the proposed investments fit into a wider plan to increase defence spending and deliver the capabilities the armed forces need.

Healey faces ultimatum over 3% defence target

The announcement comes amid a growing political battle over the pace of Britain’s military expansion.

The UK currently spends about 2.6 per cent of GDP on core defence, according to the figures cited in the supplied briefing. Nato allies have committed to reaching a broader defence-spending target of 3.5 per cent of GDP by 2035, increasing pressure on the Government to explain how Britain intends to meet its commitments.

Mr Healey previously said he would set out a path towards the higher target at the 2027 spending review. Critics argue that delaying a detailed funding plan risks leaving Britain short of the resources needed to respond to a deteriorating security environment.

Andrew Griffith, the Conservative shadow chancellor, has demanded that Mr Healey either fully fund the 3 per cent target in the Budget or resign.

“By the end of his Budget statement, John Healey must have fully funded 3 per cent defence spending, or resign,” he said.

“We are living in an era of extraordinary threats, and yet the Chancellor is dithering over finding the money to pay the country’s insurance premium.”

The Conservatives have proposed funding increased defence spending through reductions in benefits and other expenditure. Their approach contrasts with the Government’s reported plan to use long-term borrowing to support investment in defence-related businesses.

The disagreement reflects a broader political divide over how Britain should pay for greater military readiness, with ministers balancing defence requirements against competing demands on public finances.

Tories accuse Labour of copying defence fund proposal

The plans have also prompted a dispute over political ownership of the idea.

James Cartlidge, the Conservative shadow defence secretary, welcomed the proposed investment but accused Labour of adopting a policy previously put forward by his party.

“A key part of this was to make the National Wealth Fund switch its investment from Net Zero to defence,” he told The Times.

“So I welcome Labour copying our idea, particularly if that means getting more cash to UK start-ups and defence tech businesses.”

Mr Cartlidge argued that the money should accelerate the development of emerging military technologies, including autonomous systems and artificial intelligence.

He said the investment should be used to “accelerate the uncrewed, artificial intelligence-driven transformation of our armed forces”.

The emphasis on defence technology reflects the growing importance of companies developing autonomous platforms, AI-enabled systems and other innovations that could change how armed forces operate.

Access to capital can be particularly important for smaller defence businesses, which may struggle to secure financing while developing technologies that require substantial investment before they can be sold to military customers.

The proposed use of the National Wealth Fund and British Business Bank could help address that problem by directing public investment towards businesses considered strategically important to Britain’s security.

However, the ultimate impact will depend on the scale of the funding, the companies selected and whether investment translates into technologies and equipment that the armed forces can deploy.

Streeting turns fire on Conservatives

Defence Secretary Wes Streeting has defended the Government’s failure to provide a more detailed timetable for higher spending, blaming the Conservatives for leaving Britain with a weakened military and an equipment funding shortfall.

“The public must be sick and tired of the Tories complaining about things they never did,” he said.

“They owe Britain an apology, not another lecture.”

Mr Streeting accused the previous Conservative Government of shrinking the British Army and leaving a £17bn gap in the equipment plan.

“Kemi Badenoch’s Conservatives shrunk the British Army to its smallest size since the Napoleonic era and left a £17billion hole in the equipment plan,” he said.

“Their fantasy economics won’t keep Britain safe, just as their reckless hollowing out of our armed forces didn’t when they were in power.”

The exchange highlights how defence policy has become a central battleground over both public spending and the legacy of successive governments.

For the Conservatives, the question is whether Labour will provide the money and timetable required to meet its own commitments. For ministers, the argument is that the current Government must address problems inherited from its predecessors while managing the constraints on public finances.

Budget will test Britain’s defence ambitions

The proposed investment could provide a boost to British defence companies and help develop domestic industrial capacity at a time when the Government is seeking to strengthen national security.

But it will not, on its own, settle the argument over how quickly Britain can increase military spending.

The distinction between investing in defence businesses and funding the armed forces directly will be central to the Budget debate. Industrial investment can support innovation, supply chains and future equipment programmes, but the Government will still face questions over the resources available for the military’s immediate and longer-term requirements.

Mr Healey’s political position makes those questions particularly pressing. Having previously argued that Britain needed greater defence spending, he now faces demands to demonstrate how that commitment can be delivered without breaching the fiscal rules governing his Budget.

Wednesday’s announcement may offer an initial indication of how ministers intend to reconcile those competing demands.

The larger test will be whether the investment forms part of a fully funded plan to strengthen Britain’s armed forces — or leaves the central question of how the country will pay for its defence ambitions unresolved.