Rachel Reeves is said to be considering issuing war bonds to avoid a major Labour row over whether to cut benefits to fund a surge in UK defence spending.
The Chancellor is facing mounting pressure to say how the Government plans to meet a commitment to take military spending to 3 per cent of GDP by the end of the decade.
Ms Reeves last week signalled her unwillingness to use higher taxation, having already hiked the burden ‘substantially’.
But she faces a major battle with Labour MPs and unions if, as advised by former defence secretary Lord Robertson, she uses benefit cuts to find the money.
Defence bonds, which are essentially debt sold to institutional or public investors, would offer a way out by allocating ring fenced cash without impacting directly on welfare spending or taxation.
The idea was backed by a crossbench peer today, as he also suggested that the UK may have to look at conscription to help ease the Armed Forces’ manpower problems.
Cobra beer tycoon Lord Bilimora, the grandson of one of the first Indian officers to graduate from Sandhurst, told Times Radio: ‘We can’t even fill Wembley Stadium with our army. It’s the lowest level since the Battle of Waterloo.
‘We cannot go on without the critical mass, but also without the investment.’
The Chancellor is facing mounting pressure to say how the Government plans to meet a commitment to take military spending to 3 per cent of GDP by the end of the decade.
But she faces a major battle with Labour MPs and unions if she uses benefit cuts to find the money for new ship and other equipment
The idea of defence bonds has also been backed by another former defence secretary, Lord Peter Hain.
Earlier this year, writing on the Labour List website, he urged Ms Reeves to take inspiration from the Second World War, as ‘fiscal rules were modified then for exceptional, and exceptionally dangerous, times’.
‘Unless it is intended to be punitive, slashing spending on welfare is no answer to paying for increases in defence,’ he said.
‘If the alternative is not yet more public service cuts, it is essential that the financial markets finance extra borrowing without imposing higher interest rates on UK government debt – in other words without jacking up yields on bonds.’
Speaking in Washington DC last week as she attended a summit of the International Monetary Fund, Ms Reeves said she had already provided a ‘big uplift’ for defence spending.
‘Obviously, we’re working through a range of options, but my two budgets have both increased taxes substantially, and I would prefer not to have to do that again,’ she said.
Pointing out the current Iran conflict had increased the cost of Government borrowing, she added: ‘We already spend one in every £10 of what Government spends on servicing the debt.
‘And if we increase that debt further, we’d only be increasing how much we’re spending.’
Unite’s Sharon Graham last week warned the PM that his failure to produce the 10-year defence investment plan (DIP) was ‘a threat to national security’ because it risked specialist jobs being lost.
The secretary general, who has repeatedly clashed with Starmer in recent months, lined up alongside unlikely allies in former Blair/Brown era defence secretaries and Tory leader Kemi Badenoch to demand action.
But she differed from them in saying that the money required should come from a wealth tax, rather than cuts to welfare.