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.