Rachel Reeves is considering the use of war bonds to help fund Britain’s rising defence commitments, in a move that would mark one of the most significant shifts in government borrowing strategy since the pandemic.
The Chancellor is understood to be considering whether dedicated “defence bonds” could help raise around £17.6 billion to meet the Government’s pledge to increase military spending to 3 per cent of GDP by 2029–30.
Under the proposal, individuals and financial institutions would be able to purchase government-backed bonds earmarked specifically for national security and defence expenditure.
The idea has reportedly gained support from Defence Secretary John Healey and has been discussed in private ministerial meetings in recent weeks, as ministers search for ways to bridge a widening fiscal gap without breaking Labour’s tax and borrowing pledges.
One option being considered is a special-purpose bond issuance designed to attract patriotic investment from the public, potentially at lower borrowing costs than conventional government gilts.
The concept has been promoted within political circles by Labour peer Lord Hain, a former Cabinet minister, who has urged ministers to consider dedicated borrowing mechanisms for defence spending.
He said 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”, drawing comparisons with wartime financing strategies used during the Second World War.
Lord Hain has raised the proposal directly with both the Chancellor and the Prime Minister in recent weeks.
The Liberal Democrats have also expressed support for the idea. Sir Ed Davey has argued that the public could “support our defence patriotically” through bonds with short-to-medium term maturities, suggesting such a scheme could raise as much as £20 billion.
Treasury officials are understood to believe that a defence bond programme could be structured so as not to breach fiscal rules, while potentially attracting strong demand from investors seeking secure, government-backed returns.
However, the proposal highlights growing tensions at the top of government over how to fund increased defence commitments. The Chancellor has already ruled out tax rises or additional general borrowing to meet spending targets, and has also rejected changes to the pensions triple lock.
Senior figures have warned that difficult trade-offs may be unavoidable. Lord Robertson, the former NATO secretary-general and Labour defence secretary, has argued that the armed forces cannot be properly funded alongside what he described as an “ever-expanding welfare budget”.
Health Secretary Wes Streeting has also suggested that welfare savings may need to be considered to meet defence requirements, although Sir Keir Starmer is not expected to pursue such measures, given resistance from Labour MPs.
The debate comes as the Government continues to delay publication of its long-awaited 10-year defence investment plan, first promised six months ago. The strategy is still being finalised amid ongoing negotiations between the Ministry of Defence and the Treasury.
Lord Robertson has warned that continued delays risk undermining long-term defence planning at a time of heightened global instability, as Britain and its allies reassess security commitments in Europe and beyond.
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