The writer is director of Chatham House, the international relations think-tank
Don’t tell Rachel Reeves, but the UK may have to borrow more to pay for the defence spending it so urgently needs. In the next year and beyond, politicians will have to brace themselves to reclaim money through cuts to sickness benefits, pensions and healthcare, with all the threats to electoral survival that implies.
But right now? Other than swingeing spending cuts or tax rises that the chancellor has promised she won’t make, there is not much alternative to borrowing. Sir Keir Starmer’s government may join its European counterparts in discussions of whether special new defence banks or bonds might let them do this without spooking the capital markets. (The subject of increasing defence spending was on the agenda at an emergency summit convened by French President Emmanuel Macron on Wednesday.)
The sense of shock at last week’s Munich Security Conference at the wilful sundering of transatlantic ties by US vice-president JD Vance gave way hours later to urgent talks about “what next?”
Even in normal times, that conference is an intense affair, as heads of government, defence ministers and military in uniform and gold braid, cram into labyrinthine corridors and gilt-plastered meeting halls. Delegates, who responded in stunned silence to Vance’s attack from the platform, regrouped afterwards to erupt in fury, particularly Germans who saw it as interference in their upcoming election. Soon afterwards there was practical talk on how to respond — and where to get more money for defence.
The UK is in a similar position to many EU countries. “For 30 years, we have been taking money out of defence budgets and putting it into health and welfare,” one senior European minister told me. “Now, we will have to reverse that.” The point has been made by generations of US politicians and military leaders even before Donald Trump made the “freeloader” charge his own: Europe has relied for its defence on the US, making itself the continent of the proud welfare state.
Ursula von der Leyen, head of the European Commission, acknowledged that earlier this year in her analysis of Europe’s competitiveness problems: that the continent had enjoyed years of cheap gas from Russia, in effect cheap labour from China through imports, and cheap defence from the US. Now it needed to compete without them.
Easier said than done. Benefits, pensions and healthcare are popular with voters. Defence, not so much (and the UK’s Labour party has had an uneasy relationship with the industry despite fielding good defence secretaries down the years). Government ministers are looking hard at trimming the sickness benefits bill. But that is politically tough. So are other targets that might seem tempting sources of cash in theory: the triple lock on pensions and the NHS’s sluggish productivity.
“If it took decades to build up this spending, it may take decades to reverse it,” one minister said. Hence the quiet exploration of whether borrowing might be needed, at least for a few years, and how to do it in the least alarming way.
Simply borrowing more breaks financial rules, as Reeves has told Starmer. Even if those rules are self-imposed, they are designed to reassure markets that government spending will not get out of control. The fiscal constraints of the European Stability and Growth Pact, devised in 1997 to maintain fiscal and monetary stability, were created for the same reason (if not always observed).
But the stark US message has prompted new ideas. A group, which has attracted interest from Poland, is exploring a new rearmament bank to solicit capital from European governments and borrow against it. Some are talking about defence bonds, to be issued by governments with their purpose engraved into their names in the hopes of persuading capital markets not to push up borrowing rates. Others are wondering if EU countries might agree that defence spending be excluded from Stability and Growth Pact calculations.
There will be more ideas, and the UK can share the task of exploring them. Starmer will soon have to name a date by which the UK will meet 2.5 per cent of GDP on military spending — and there is already a chorus arguing that this figure needs to be higher.
In the end, politicians will have to persuade voters to surrender some of their benefits to pay for defence, perhaps the essential public benefit above all, even if it has been taken for granted for decades. In the meantime — starting now — the quickest way to get the money needed is to borrow it.
