The recent (and long overdue) release of the UK’s Defence Investment Plan (DIP) has only intensified the long-running debate about how to fund an increase in the UK Defence Budget, a debate that has already cost the Labour Government two Ministers. Cursory examination of the Government’s plans soon revealed that rather than being “fully funded”, the plan actually requires a further £4.7bn of cuts to other departments and £10.7bn of “efficiency savings” in the next 4 years, neither of which have yet been identified. It also fails to provide any budget for 2030 onwards, with that can kicked down the road for the next Prime Minister.
In January of this year, Ed Davey announced our solution to the problem – Defence Bonds (https://www.libdems.org.uk/press/release/ed-davey-calls-for-defence-bonds-to-fund-pound20bn-boost-to-military-spending-and-reduce-reliance-on-us), a policy announced without consultation or debate within the Party. This plan proposes raising £20bn over 2 years, ring-fenced for defence capital spending, to “give ordinary people the opportunity to contribute to Britain’s security”.
In my opinion, this plan is both a bad way to fund defence, and also won’t work. For background, I spent over 30 years working in the defence industry, the last 20 of those as a Director and part-owner of a manufacturing SME. I lived with the daily challenges of budgeting and planning, and in that time experienced both the best and worst of UK defence procurement. While I enjoyed the dubious “pleasure” of being a supplier on the infamous Ajax armoured vehicle programme, it’s important to note that despite the bad press UK defence procurement is not all bad. I was also directly involved in numerous projects where the MOD and industry worked together to achieve amazing results, delivered quickly and on budget, that saved lives in Iraq and Afghanistan.
My first objection is that a short, sharp injection of £20bn over two years is not nearly as helpful as it might sound. What the MOD, and just as importantly industry, needs is the certainty of a long term (10+ year) cash budget to plan against. Uncertainty leads to inefficiency, and suddenly throwing £20bn at the MOD would lead to some terrible outcomes. The MOD would of course do its level best to spend that money, because it would fear any under-spend getting clawed back by the Treasury. But as we have seen before during the Pandemic, when the Government tries to spend a lot of money quickly it leads to failure, waste and fraud. While some good, innovative solutions might be funded, it would also act as a honeypot to every snake-oil salesman with a glossy powerpoint and no track-record.
My second objection is that if the plan as presented is to raise this retail investors (the “ordinary people”) then it will fail to raise an additional net £10bn per year. Currently, National Savings & Investments (NS&I) raises about £10bn a year from retail investors via sales of Premium Bonds, Green Bonds and other products, so this plan requires raising as much again as NS&I already raises. But crucially, it has to do this without cannibalising existing NS&I product sales otherwise the Government is no better off overall.
The Party’s press release quotes the existing “Green Gilts” scheme as an analogy, but this is misleading. In fact 95% of Green Gilts are sold to institutional investors – it is Government borrowing with a green makeover, for institutions and funds that need an ESG (environmental, social, and governance) gloss. In reality, Green Bond sales via NS&I to retail investors only raise about £1bn a year, way short of the £10bn targeted by the Defence Bond proposal. Of course institutions may choose to invest in Defence Bonds, but they will need to be motivated by return on investment rather than patriotism, so it would just be more Government borrowing at the prevailing rate and at the indulgence of the bond markets.
In my opinion the only way to fund long a long term budget increase is via taxation. This could perhaps be supplemented by a more modest but longer term Defence Bond plan – £2bn a year for 10 years would be more credible and achievable from retail investors. But the current proposal of £10bn per year for 2 years is not achievable, and would lead to enormous waste if it was.
I hope the Party will think again, and come up with a credible and deliverable plan to increase the UK’s defence spending via a reliable 10 year budget that will allow long-term planning by both the MOD and industry, and provide the certainty needed to support private sector investment.
* Nick Baird is Chair of the Cheltenham Liberal Democrats, member of the Lib Dem Friends of the Armed Forces, and a long-standing defence procurement nerd.
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16 Comments
Assuming that we all agree that defence spending needs to rise, there are 3 ways this can be funded: increasing taxes, increasing public sector borrowing or reprioritising current public spending.
Increasing taxation will be difficult to sell politically. Most voters believe that taxes are high enough and would resent paying more when they believe the taxes they already pay could be better spent.
Increasing public borrowing smacks of generational unfairness – loading debts on future taxpayers that we don’t want to pay
Reprioritising current spending avoids increasing taxes or adding to national debt but involves hard choices as to what spending get reduced to free up the resource to transfer to defence. The most politically popular option would be to reduce our massive welfare and state pension spending, especially by ending the triple lock and the number claiming disability benefits for anxiety etc.
@Jana – ending the triple lock won’t reduce the current level of spending on pensions. It will just reduce the future growth of that expenditure, that will inevitably continue to increase to some extent as the number of pensioners increases.
Deciding when to end the triple lock is surely a necessary conversation for keeping public finances viable but not sure it will be a politically popular one. Ditto talking about stopping sickness benefits is one thing following through on that when hard cases are brought to MPs about x and y loosing out is another.
@Nick Baird
Absolutely correct. However if it resulted in a pension increase next year 1% less than it would otherwise be, it would save £14 Billion compared to if we kept the triple lock.
@Jana – there are savings which can be made within benefits system and based on who is paid, true, but only if we recognise that many people get paid when they shouldn’t and many people don’t get paid (or paid enough) when they should, so that any savings for a full and fair system are much less than our current crop of politicians are currently suggesting. If a political party makes cuts without understanding this, then many people’s health will become worse and spending on benefits will need to increase anyway.
In fact, isn’t that always the way? PIP coming into replace DLA all those years ago was meant to make savings but here we are, LCW payment changes within UC (reducing this award to £0 additional payment) was meant to make savings but just meant more people going for and getting LCWRA…
And the assumption that defence spending really does need to rise – in a country with already the 5th or 6th highest defence budget in the world – is another dubious one. France, Poland, Israel, South Korea … all manage to maintain perfectly acceptable military forces with considerably less ongoing funding.
Throwing money at new technology doesn’t address the military’s serious and ongoing recruitment issues either, and I can’t see the Lib Dems deciding that “conscription” is going to be their “distinctive and bold” policy stance.
Jana 2nd Jul ’26 – 2:40pm…Assuming that we all agree that defence spending needs to rise,…
I don’t! The top military brass ALWAYS want more and worldwide defence manufactures feed that want…
I’m old enough to remember Kennedy’s claim that the USSR was way ahead of the USA in missile capability; they weren’t.. The ‘Foxbat’ incident also comes to mind when rumours of a Russian ‘super plane’ panicked the USA into a massive military spend.. In fact ‘Foxbat’ was old technology as a ‘donated’ plane showed ..
Russia can’t even handle Ukraine and is bankrupting itself trying.. The idea that it will turn on NATO is laughable..
@George Thomas
“….but only if we recognise that many people get paid when they shouldn’t and many people don’t get paid (or paid enough) when they should….”
Implying the benefits system is a complete mess?
… the Lib Dem Defence Bonds plan is a bad idea ??
It’s quite a good idea but not for the reasons suggested by the originators of the plan. We had a similar, but lesser, problem some 80 or so years ago. Keynes explained his thinking, then, in his pamphlet, “How to Pay for the War”, published in the early years of WW2, at a time when conventional thinking about the workings of the economy was quite wrong, just as it is now. If Keynes hadn’t been able to get his message across we would have decided there was no money to pay for it and the best thing to do was simply negotiate to get the best surrender terms possible. Many in the Tory party wanted to do just this.
Keynes reasoned that it wasn’t about money per se but resources. The first thing to do was make sure that these, as far as possible, weren’t wasted. So we had to eliminate unemployment and make sure that everyone was contributing in a meaningful way. Resources had to be diverted from providing for peacetime purposes and towards the war effort. This is where extra taxation and the sale of bonds came in. The sale of bonds wasn’t going to be that useful, though, if they took up money, as they probably will now, that wasn’t going to be spent anyway. Rationing helped ensure that.
/cont
Raising money to buy a Spitfire, whether or not through the sale of war bonds, didn’t help build any more Spitfires but the sales drive had a positive psychological effect on the population who then felt they were contributing to the war effort in a meaningful way.
The big problem, then, just as it would be now, is that the extra spending was likely to lead to inflation. To counter this Keynes proposed that taxes should rise and also that prices and wages should be tightly controlled. Part of the plan was also to forcibly channel part of everyone’s wages and salaries into forced savings to stop them spending it.
Of course what would have been politically possible then may well not be now. Thankfully the scale of the problem is nowhere near as great, but the economic realities are just the same, so we need to approach the problem in the same rational way as Keynes did.
@ Jana,
“Increasing public borrowing smacks of generational unfairness – loading debts on future taxpayers that we don’t want to pay”
No it doesn’t.
The standard of living for future generations will be determined solely by what they will be able to produce and the state of the environment we leave to them.
Agreed. This policy is populist and dishonest. We shouldn’t pretend that we can spend money on things without having to pay for them.
The MOD seems to be spending its existing budget very badly. Ajax, as a kick off. All the attack subs in port. the ballistic missile subs so badly maintained that they are doing 6 month patrols. The aircraft carriers (ha) breaking down. The type 45 destroyers that had to have their engines ripped out and replaced because they didn’t work in warm water. and only 1 available. The frigates that are rusting out because they are 20 years past the end of their planned life. The f35A proposed purchase that will require different maintenance to the Bs, and can’t be used on the carriers (see above). The Raf’s Typhoons seem to be working fine, and possibly the challenger tank upgrades will work – although it might have been better & cheaper to buy Korean K2s. The naval “drones” in the plan are more like uncrewed ships or arsenal barges. And only 6 Command vessels? About the only sensible thing in the DIP is the commitment to the next generation warplane- not buying another US one.
So perhaps before we cut all sorts of desirable other spending, we stop wasting money?
Thanks Nick for this well argued piece from someone who clearly understands policy and its pitfalls. Nick’s proposed longer term solution is a far more sellable proposition.
Why does Ed Davey and his team continue to announce policies that have had little or no internal party scrutiny, and are full of holes. Another recent example was Daisy Cooper’s DOG – not inherently bad but very poorly thought through and open to ridicule (IMO, sorry Daisy!). What are the FPC doing, and why are we (members) not getting any explanation of these sort of proposals before, or at least when, they are announced?
I agree with Nick Baird about defence bonds being a bad way to fund defence. But more generally, this whole debate feels backwards. Is there ever any situation where starting from the premise of, ‘We must spend £X Billion on something’ gets good results? Surely the better thing to do is rather to ask, ‘What threats are facing us? In what ways is our defence currently inadequate to meet those threats? How can we best plug those deficiencies? And what would that cost? THEN it makes sense to have a discussion about where the money should come from.
@ simon robinson. Exactly
I suspect that one threat that is concealed is that the UK will no longer be a global power. So they send a carrier battle group to the south china sea and join in the USA’s dodgy wars, rather than thinking about real threats toUK & Europe.
@Nigel Quinton – thank you for your kind words.
@Simon Robinson – in theory, that’s what happened. The Government appointed an independent team to review the threats the country faces, and that was issued last year as the Strategic Defence Review (SDR). The MOD then created the Defence Investment Plan (DIP), which is how they intend to address those threats over the next 10 years.
The problem is that when the DIP was costed, the Government didn’t like the price tag. The gap between the cost of delivering the DIP and the budget the Government was expecting to spend was £28bn. Of this, about £18bn was underfunding of the existing plan left by the previous Tory Government, and £10bn was ‘new’ to respond to the SDR.
Hence over 6 months of wrangling between the MOD and the Government…