Liberal Democrats Propose "War Bonds" for Defence Funding
The Liberal Democrats have put forward a proposal to issue "war bonds" to the public, seeking to raise up to £20 billion for military expenditure. Under this plan, individuals would be able to lend money to the government via bonds with a two-to-three-year term, offering interest rates comparable to standard government bonds.
Liberal Democrat leader Sir Ed Davey stated that these bonds would offer a direct way for citizens to contribute to national security.
"ordinary people to contribute to Britain's security."
Government Response and Defence Context
A government spokesperson responded by indicating that "new debt instruments" are under continuous review. However, they emphasized that any such instruments must demonstrate "value for money" and align with broader fiscal objectives.
"new debt instruments" are continuously reviewed, but must demonstrate "value for money" and align with broader fiscal objectives.
Calls for increased defence spending have intensified following Russia's 2022 invasion of Ukraine and former US President Donald Trump's criticisms regarding NATO members' military contributions.
The Labour government has committed to increasing overall defence spending from 2.3% to 2.5% of national income by 2027, an estimated additional £6 billion annually. A further increase to 3.5% by 2035 is also planned, consistent with NATO pledges.
Despite these commitments, reports suggest that preparing Britain's armed forces for "war readiness" could require an additional £28 billion beyond current allocations. Publication of the government's defence investment plan was reportedly delayed due to cost concerns. Earlier this month, Sir Richard Knighton, head of the Armed Forces, issued a stark warning.
"not as ready as we need to be for the kind of full-scale conflict we might face."
Justification and Historical Precedent
Sir Ed Davey underscored the urgent need to acknowledge current threats, specifically citing "Vladimir Putin waging war in Europe" and "Donald Trump tearing up the rules and alliances." He argued that strengthening defences is crucial as a deterrent.
The Liberal Democrats contend that funds raised from these bonds would be specifically earmarked for defence. They assert this would contribute to "growth, jobs and higher revenues" for the government, thereby partially offsetting debt servicing costs. The party also recommended a comprehensive overhaul of the Ministry of Defence procurement process.
The proposed scheme draws parallels to war bonds issued during World War One and World War Two. These historical bonds allowed citizens to lend money to the government, which was then repaid with interest over six to ten years. The WWII scheme alone reportedly raised £1.754 million by the end of 1945.
Market Perspective
Dan Coatsworth, head of markets at AJ Bell, commented on the proposal, acknowledging that "war bonds" are a proven method for funding national defence. However, he also noted that they can generate long-term government debt.
He suggested that the public might seek higher interest rates than those offered by traditional bank savings. Coatsworth added that while some individuals might purchase bonds out of civic duty, others would likely view them purely as an investment opportunity.