The solution to how we unlock greater defence investment can be found in the former Defence Secretary’s letter of resignation. John Healey argued there are credible ways of meeting the funding challenges posed by a more dangerous world through working multi-nationally with other countries. He was right.
For too long, our defence debate has focused on spending targets: percentages of GDP, Treasury settlements and fiscal rules. These matter, but they are not enough. We also need to ask how we finance the industrial expansion required to deliver the capabilities our Armed Forces need.
Budgets do not build factories. Industrial capacity does.
This is why I have spent the past 18 months leading the campaign in Parliament for the UK to co-found the Defence, Security and Resilience Bank.
Next month, Canadian Prime Minister Mark Carney is due to convene our allies to sign the Charter establishing the DSRB at the NATO Summit. If they do, it will become one of the most significant new institutions in transatlantic security for a generation. Britain should be there at the table.
Some have portrayed the DSRB as little more than an SME finance initiative. That misses the point. The Bank may begin with SMEs, but its purpose is to strengthen the whole defence industrial ecosystem, from start-ups and specialist manufacturers through to prime contractors and governments. Its mandate spans research and development, industrial expansion, credit guarantees, private capital mobilisation and sovereign lending.
In short, it is designed to turn political commitments into industrial output.
Across the defence sector, companies face two linked challenges: access to capital, and confidence in future demand. Without finance, firms cannot expand. Without demand, they will not. Some will point to initiatives such like the Multilateral Defence Mechanism, which is important because they help coordinate procurement and signal demand with our allies. But they do not solve the finance problem. The DSRB does. Britain needs both: clearer demand, and the capital to turn it into real defence capacity.
Together, they create the conditions for more factories, jobs, exports, innovation and resilient supply chains. That is not merely defence policy. It is industrial policy.
The DSRB is being created by sovereign nations for sovereign nations. Its financing will be directed towards companies domiciled within participating member states. Countries contributing capital will expect that capital to support jobs, investment and growth within the nations that have chosen to join.
The risk for Britain is obvious. If we are left outside this institution, British companies will be shut out of a growing pool of allied defence finance. Factories financed by the Bank, production lines expanded through its lending and technologies brought to market through its investment will increasingly be concentrated within member nations.
At a moment when the Government is searching for growth, voluntarily excluding British firms from a new ecosystem of allied defence investment would be an extraordinary decision we would regret. The frustration Britain has already experienced from limited participation in the European Union’s SAFE programme should serve as a warning. When new institutions are created, the rules are shaped by those at the table.
The terms are favourable. Britain’s contribution would be €1 billion over three years – about €500 million below what it would have been with the standard GDP-based formula, following a G7 discount secured during the Charter negotiations. Participation in the DSRB is an investment. Britain would be purchasing equity in a new multilateral bank designed to finance allied industrial growth, defence production and economic resilience. It is exactly the kind of strategic investment our National Wealth Fund was created to make. The UK’s paid-in contribution could be provided through the Fund in exchange for an ownership stake in the Bank. There would be no need for further departmental cuts or additional borrowing to fund out capital contribution.
Some critics will still argue that borrowing is borrowing. That misunderstands another important feature of DSRB. The United Kingdom can already borrow through the gilt market. But every additional pound of borrowing adds pressure to the same financing channel.
The DSRB creates something different: a AAA-rated multilateral borrowing platform backed by multiple allied governments rather than the UK alone. In effect, it creates a new allied defence financing yield curve alongside the UK’s own gilt market. It gives Britain access to another source of long-term capital, with more options, flexibility and potentially lower financing costs.
If we seize this opportunity now, we can also secure wider benefits. As one of the largest economies involved, Britain could secure an operational presence within the bank, exert real influence over the institution’s strategy and direction, and reinforce London’s role as a global financial centre.
This investment would be a significant show of strength to our enemies and a commitment to our allies. But is also foundation for a defence industrial policy that delivers national security and boost growth.
More factories.
More jobs.
More exports.
More innovation.
The obvious question is how Britain can afford to participate.
The better question is whether Britain can afford not to?
This article is the opinion of the author and not necessarily that of the UK Defence Journal. If you would like to submit your own article on this topic or any other, please see our submission guidelines.
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Its debt, the bond markets wont care whoever lends the money. Its still a liability and it will only increase the cost of borrowing. That’s ignoring the inflationary effect of more borrowing. The only way more can be spent on defence is politically painful cuts elsewhere.
Nonsense Ron. It is perfectly normal for countries to borrow for capital projects.
Once again for the hard thinking. The bond markets don’t care what the money is spent on. It looks at the balance sheet and sees a higher liability and a greater risk of default. Its will respond by demanding a higher coupon for lending on the 125 billion a year the government is borrowing. Debt intrest is already the 3rd biggest expense to the government, its over twice the defence budget. See the Liz Truss budget or the 1976 Sterling crisis for what happens when you go on a borrowing spree.
Ron. The Bond market will see the UK boosting their expenditure on defence and it’s companies position as a major player in the emerging arms markets plus a boost to associated industries. They will see this as a Country worth lending money too because they wish to make a long term profit.
I agree Rob, the concept of war bonds, multilateral pulling mechanisms or private finance seems to be totally lost on service chiefs and the “main stream media” and it’s never ending chorus of talking heads who all seem to think they have the perfect solution.
The UK has one of the highest credit ratings in the world, the higher cost of GBP funding relative to other G7 economies is almost entirely due to inflation forecast not credit worthiness. The last UK gilt auctions had near record numbers of subscribers. Plenty of people want to lend money to the UK government and if we wanted more we can easily funnel UK bank capital or pensions into the cash flows like Germany does. The UK is the second biggest holder of US debt in the planet.
But it’s all just debt. We should not be borrowing in peace time to fund defence budgets, we should be paying our way by cutting welfare including pensions, cutting inefficient government spending and raising taxes where needed. Running a 4% budget deficit now is criminal.
The treasury are not daft, all the hype from the MoD and the Media about how dangerous the world is won’t work on them because it’s largely a media generated fantasy.
Arguing for the same budgets we had to face off against the Warsaw pact and the Soviet Union or Nazi Germany won’t work because Russia sent a mini sub to try and inspect a telephone cable near Shetland.
The UK Allie’s on Europes eastern boarder have serious security worries, the UK obligations under Article 5 are overshadowed by the obligations of Eastern Europe under Article 3. That’s why these countries can and should be out spending us, especially after they spent decades not spending on defence and enriching Russia via gas purchases.
The “need” for major UK spending boosts has everything to do with a desire by the British establishment to remain diplomatically relevant in the world and especially with the USA. It’s has very little to do with any direct threat to the UK.
If we want a national consensus on spending much more then we need to be honest with people about why we are doing it.
Of all the new systems and capabilities the MoD wants to purchase, almost none are for UK mainland Defence.
Again the treasury knows all this which is why they are not being swayed.
Let’s not pretend their is some magic way to borrow money for defence that don’t just leave us saddled with more debt.
The UK credit rating was cut after 08, and we are paying more to borrow money than Italy. The UKs debt to GDP ratio stands at 93%. When you include PFI that hits 101%. There’s no more borrowing that can be afforded.
Whilst I do agree that we should borrow money for capital investment I don’t feel we need to borrow from an international defence bank. That doesn’t make sense for a country like ours. The Bank of England should be able to loan the country any funds it needs for defence and any national emergency funding such as a war, medical outbreak, etc.
Indeed I would suggest that the UK should be able to set up a bank for other countries to borrow money for defence spending. Even if it did so as part of a consortium. When it comes to war the UK normal starts on it’s own.
The Bank of England doesn’t loan money. The money comes from the bond markets. Domestic Private Financial Institutions, eg pension funds, own roughly 40%. Overseas Investors own another 30%. The rest is QE from the credit crunch but thats being slowly sold off.
I’m far from a finance expert but surely this all comes back to priorities? We can fund dramatic increases to defence spending but there is simply a lack of willingness from this government to do so.
I don’t see how joining the DSRB really changes that.
Please feel free to correct me.
You are correct. Politicians want their cake and eat it. They make noises about defence but don’t want to make unpopular cuts to fund it. Magic money tree borrowing isn’t going to work.
In a sense you are correct there are priorities. There are also costs which are not really optional. Defence is one of those costs. We either have sufficient assets to defend ourselves if necessary or we don’t. We have, as a Country, become complacent and think that war is never going to come our way ever again. If we think like that it will and many will die.
A defence bank will suit many smaller countries but we are economically massive and should if anything be loaning money to other countries.
We need to get a grip on our discretionary spend I afraid. We need to spend money but we need to do better than we are.
I agree Mark. Whilst i appreciate the need for the Welfare state i would argue it’s clear a change of direction is needed none more so than what the government spends our money on.
Alex it appears to me that, as is normal with Labour politicians, that you have forgotten that the first responsibility of any Government is defence.
The Country is spending too much on other stuff which must ultimately be reigned in.
Once you get to a point where there is too much support going on something needs to change. If you are a politician you need to enable a position where you get more and more people standing on their own two feet so everyone can share the load of the few remaining.
Defence is not an inconvenience draining the Government pot. It is a necessity without which the Country would be Governed by people who do not care if we live or die.
Ultimately we, as a Country, we must pay for everything. We need to invest in kit and people, get on with providing that. The treasury know where to get the money and where to save money. Get on with it.
People say the first priority of any government is defence but it’s not actually written down anywhere and for a small island in the North Atlantic actual defence could be done on a fraction of what we spend.
We spend 13X more than Finland which has a much much more dangerous security situation than us.
We have an expeditionary armed forces largely to fight other people’s wars which in turn promotes our own security.
We spend £70 billion a year which is a vast sum of money but very little of that is for the defence of the UK, almost all of it is our contribution to the collective west and its global security order which certainly benefits us but not really anymore of less than anyone else.
It’s simply common sense that defence is the first duty of the government because existential threats make everything else irrelevant.
You need to watch any of a Sarah Paine’s excellent lectures on Maritime Powers v Continental Powers to understand why we spend money to ensure freedom of navigation and expeditionary warfare.
The way to fund our defence is to do what every other country on the planet is already doing; USE or TRADE our natural resources. We have abundant reserves of coal, oil and gas but most of those reserves lie undisturbed where providence was kind enough to place them.
By far the easiest resource to exploit is shale (oil and gas), we do not need a new bank to do this.
Good luck with the NIMBYS, the planning permissions, impact reviews, and legal challenges, will see any production pushed into the 2030s.
What’s the break even on UK shale. The Texas shale oil break even point is $58 a barrel. UK shale formations are twice as deep as Texas. Balance sheets exist, you can’t handover them away.
So this is like back in the 90s, when the most profitable part of large IT companies (eg IBM, HP) was the Financing Unit. The unit loaned money to potential customers so that they could buy the hardware from the company. Essentially high-purchase for corporations. The interest was greater than the actual profit on the hardware sold. But that wasn’t the point, it drove hardware sales.
The DSRB will allow nations to borrow money to buy arms from those armament companies based in the founder-nations of the DSRB. Significantly, because the DSRB is rated AAA- the cost to the nations taking out loans will be cheaper than them issuing their own bonds (gilts in U.K. terms).
Once set-up and running, unless it occurs lots of bad-debts, the DSRB will be self-sustaining.
Being a member of the DSRB will make arms and ammunition made in the U.K. cheaper to other nations, boosting our defence sector. A win.
Should the UK also decide to borrow money from the DSRB the interest we would pay will be less than on the bond market. A win.
Seems a no-brainer to me 🤷🏻♂️