War bond debate returns as Burnham weighs UK defense funding options

Andy Burnham’s expected move into Downing Street has revived discussion of war bonds as a way to help fund Britain’s military buildup, Bloomberg reported. The idea matters because the UK government is under growing pressure to lift defense spending without breaking its fiscal promises or turning again to broad tax rises.

Prime Minister Keir Starmer rejected the proposal earlier in June, telling the House of Commons that war bonds would be “just another form of borrowing,” according to Bloomberg. Burnham may be more open to it: Bloomberg reported that Andy Haldane, a former Bank of England chief economist and one of Burnham’s advisers, has previously backed the concept.

The plan would amount to a government bond sold directly to the public, with the proceeds earmarked for defense, Bloomberg reported. Supporters argue that British households hold large sums in savings accounts and could be drawn to a state-backed product tied to national security, especially if it came with tax advantages.

Bloomberg reported that Britons put about £70 billion, or $92.5 billion, into individual savings accounts each year. Up to £20,000 can be sheltered from tax, and a large share sits in cash ISAs, which can pay relatively low interest rates.

The idea has found support beyond Burnham’s circle. Bloomberg reported that the Liberal Democrats have raised war bonds 25 times since the start of the year, while senior City of London figures have put the proposal to Chancellor Rachel Reeves.

Defense funding has become a harder political problem for Labour. John Healey quit as defense secretary earlier in June, along with junior minister Al Carns, after arguing that planned increases would not be enough to protect the country, Bloomberg reported.

The government is due to publish a delayed defense investment plan before the NATO summit in July, according to Bloomberg. Ministers are still studying how to push the planned increase above £13.5 billion, while some backers of war bonds say they could bring in another £20 billion.

City economists have proposed making the bonds exempt from the 40% inheritance tax, Bloomberg reported. Gilts are already free of capital gains tax, and Nicholas Lyons, chairman of Standard Life Plc, said the product should raise at least £10 billion in its first year, with more to follow.

Lyons and Simon French, chief economist at Panmure Liberum, said the structure could lower borrowing costs and strengthen the gilt market, around one-third of which is owned by foreign investors, according to Bloomberg. French said a tax-exempt 10-year bond could pay about 0.5 percentage points less than a standard 10-year gilt while still attracting retail buyers, especially older savers with large assets.

The tax treatment would carry a cost. Bloomberg reported that exempting the bonds from inheritance tax would cut future receipts for chancellors.

The Guardian reported that officials in No. 10 plan to press Burnham to adopt the idea, while Bloomberg said his advisers may not agree on it. Haldane has supported the principle, but former Goldman Sachs economist Jim O’Neill has been more cautious.

Burnham has stepped back from earlier suggestions that defense spending should sit outside the UK’s fiscal rules, Bloomberg reported. He has said he would keep Reeves’ framework, under which day-to-day spending must be covered by revenues by the third year of the forecast and net debt must fall as a share of the economy by 2029/30.

O’Neill has said Burnham would look for room within the rules to spend more on growth-supporting infrastructure, according to Bloomberg. Reeves said this week that most defense spending counts as capital investment and that a multilateral European defense mechanism could allow more munitions stockpiling off the government balance sheet.

Bloomberg reported that supporters see a precedent in UK green bonds, launched five years ago and opened to retail investors in March. With defense now higher on the political agenda, war bond advocates are seeking the same kind of dedicated borrowing tool.

This story draws on original reporting from Fortune.