Budgets don’t build defence: Britain must join defence bank

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.

Labour MP urges Treasury to back international defence bank

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.