Chancellor John Healey intends to use Public Financial Institutions to increase defence spending towards meeting the NATO target of 3.5 per cent of national output by 2035, according to detailed reporting of his Budget plans. The strategy involves allocating an additional £15.4 billion to the National Wealth Fund and a further £5 billion to the British Business Bank to support investment in new defence technology including drones.
The approach works technically because funding through Public Financial Institutions is defined for investment rather than current spending, meaning it does not breach the government's fiscal pledge. However, this redefines the original purpose of both institutions. The National Wealth Fund was created according to Labour's manifesto to invest in ports, hydrogen and industrial clusters, with no mention of defence. The British Business Bank was established to back UK innovation.
Healey's plan follows a significant moment in his political career. He resigned from then-prime minister Sir Keir Starmer's Cabinet over a dispute with predecessor Rachel Reeves regarding the military budget. This dispute helped lead to Andy Burnham becoming Prime Minister and Healey moving to the Treasury. The current government faces pressure from bond markets, leaving limited fiscal space for additional spending without making substantial cuts to public services.
Critics argue the funding method obscures the true nature of defence spending, treating it as an off-balance sheet item that amounts to disguised borrowing. The approach does nothing to address immediate military needs, such as staffing shortages in Britain's Armed Forces or purchasing anti-ballistic weapons, satellite defences or sustaining air force operations currently deployed in the Arabian Gulf. Unlike some NATO allies, such as the Netherlands, Britain has no regiments of young trained reservists ready to deploy.
For UK savers, borrowers and businesses, higher government borrowing costs from defence spending financed through investment institutions could increase the cost of government debt service and potentially affect interest rates across the broader economy.
The Chancellor's strategy represents a novel approach to meeting NATO commitments while navigating tight fiscal constraints, but questions remain about whether long-term investment funding can adequately address the Armed Forces' immediate operational and personnel needs.