Defence Funding

Thursday 16th May 2024 Lords Chamber

Question

11:27

Asked by

[Baroness Goldie]

To ask His Majesty’s Government whether they intend to replicate the approach of the Green Savings Bonds to provide incremental resource to fund the defence capability by issuing a defence bond.

[The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)]

My Lords, the Prime Minister recently set out our pledge to increase defence spending to 2.5% of GDP by 2030. That increase starts today, will rise each year and will see defence spending rise to £87 billion a year by 2030-31. This is the biggest strengthening of our defence since the Cold War. The commitment will be fully funded, with no increases in borrowing or debt. Therefore, we have no plans to issue defence bonds.

[Baroness Goldie (Con)]

My Lords, I thank my noble friend for that response. I of course welcome the Prime Minister’s commitment, which is reassuring and provides a clarity that is much needed. My Question is designed to explore innovative ways of augmenting defence spending and thereby assist the Treasury. The Government vigorously promoted green gilts and green investment bonds to fund green expenditure. If that is an acceptable funding principle for the environment, why is it not for our national security?

[Baroness Vere of Norbiton (Con)]

As I have outlined, the Government will use existing resources to fund this increase in defence spending, but my noble friend makes an important point: our superb defence industry needs investment. Although the Government are the main customer of the defence industry, as are exports, these are of course private companies and they do need investment. There are some reports that defence is being excluded on ESG grounds. The Government have confirmed and are absolutely committed to the fact that investment in good, high-quality, well-run defence companies is compatible with ESG considerations.

[Lord Campbell-Savours (Lab) [V]]

My Lords, with the green savings bonds success in mind, would not it be appropriate, while considering the benefits and viability of a defence bond, to complement its introduction with the issue of a peace bond: a bond that invests in NGOs that promote conflict resolution, peace initiatives, international understanding, political exchange and sensitive and constructive media intervention overseas; a bond that funds a fostering of links and exchange with more problematic parts of the world; a bond that tempers the slide to conflict and war?

[Baroness Vere of Norbiton (Con)]

My Lords, as I have already set out, the Government are not about to start a plethora of different bonds for different measures, but the noble Lord is right that the green bonds have been successful. The funds raised from those bonds have been invested in things such as cycling and walking, electric vehicle home-charging, plug-in grants for cars and vans, and the Nature for Climate Fund.

[Lord Stirrup (CB)]

My Lords, in the Prime Minister’s speech he highlighted perils that some of us have been warning about, to little avail, for more than a decade now. The Government’s response seems to be to increase the defence budget in six years’ time to a level that, allowing for accounting changes, will still be below where it stood in 2010. In light of the Prime Minister’s speech and in line with the Question from the noble Baroness, Lady Goldie, is it not high time the Treasury addressed itself to the question of how we can, rather than why we cannot?

[Baroness Vere of Norbiton (Con)]

I am grateful to the noble and gallant Lord for his intervention, but the Government have committed to increase NATO-qualifying defence spending to 2.5% of GDP. That will make us the biggest defence power in Europe, and second only to the US in NATO. If all other NATO members were to increase their spending to the same levels, that would mean an additional £140 billion to be spent by allied nations.

[Baroness Kramer (LD)]

My Lords, the UK’s green gilts have been justified as necessary to promote London as a global centre for green finance, and they have been successful, but defence bonds would bring no such advantage and surely should be funded from core taxation. What would be the impact of defence gilts on general gilts issuances, on the national debt, on our annual interest payments and on funds for other public services?

[Baroness Vere of Norbiton (Con)]

Of course, I do not have the answer to those questions because the Government are not intending to issue defence bonds. However, the noble Baroness mentioned one of the rationales for issuing green gilts—ensuring that the City of London is a global financial centre—and she is absolutely right. Indeed, we are the No. 1 financial centre for green finance.

[Lord Naseby (Con)]

Is my noble friend aware that investment in good defence companies is entirely compatible with ESG? Will she ensure that our fund managers in the City take a copy of what she has stated today?

[Baroness Vere of Norbiton (Con)]

I am very happy to reiterate what I said about the Government’s commitment to the defence industry, ensuring that it receives the amount of private sector investment it needs. My noble friend may have seen that, to that end, there was a joint government/ Investment Association statement to fund managers that gave exactly the clarity he seeks.

[Lord Alton of Liverpool (CB)]

My Lords, notwithstanding that the 2.5% by 2030 is welcome in comparison with where we have been, was not my noble and gallant friend right to remind the Minister and the House of that fact—not least in the context of the International Relations and Defence Committee report two years ago, which urged urgency in addressing the multiple threats from dictators in Russia, China, North Korea and Iran? Is not the noble Baroness, Lady Goldie, who has huge experience in this area, right to look at innovative and different ways of adding to what we can do in a more urgent manner? To that end, will the Minister consider a private round table discussion here in the House to explore that idea further, so that some of the figures that have just been mentioned might be laid before us?

[Baroness Vere of Norbiton (Con)]

The noble Lord seems to imply that this is a timing issue. The Government have heard all the messages coming from various quarters about the urgency and the threats we face. We do understand them, but the funds we are now going to put into the system are timed such that they can be most effective. For example, we will be spending on firing up the UK industrial base, but that cannot happen overnight. Our defence companies need multiyear certainty, which, of course, we get from the £10 billion commitment to a new munitions strategy, for example. Again, that does not happen overnight. We are content that the timing is right. As I say, we do not intend to issue defence bonds.

[Lord Houghton of Richmond (CB)]

My Lords, now that I have heard about the Minister’s initiative, I am less personally concerned about the scale and esoteric source of the defence uplift. Like many, my prime emotion is relief, not jubilation. My concern is that the uplift is well spent. On behalf of government, can the Minister reassure the House that the priorities for the uplift will be keeping Ukraine in the fight this year and then re-establishing the credibility of conventional deterrence in Europe?

[Baroness Vere of Norbiton (Con)]

I can absolutely give that reassurance. In addition to firing up the UK industrial base and the £10 billion on the new munitions strategy, the third key area that the additional funds will be spent on is guaranteeing for as long as it takes support for Ukraine. Obviously, that will build on the billions of pounds in military support we have already committed to Ukraine, as well as the extra £0.5 billion announced by the Prime Minister alongside the funding uplift.

[Lord Livermore (Lab)]

My Lords, the Labour Party is fully committed to increasing defence spending to 2.5% of GDP, a level that was last met 14 years ago, when Labour was in office, so we welcome the Government’s recent commitment to this target. In her first Answer, the Minister stated that the commitment was fully funded. However, it was not included in the March Budget, and it is not clear how they intend to fund it within their fiscal rules. In the event that there is another fiscal review this autumn, can she guarantee that it will be included and submitted to the OBR to ensure that it is openly costed and independently validated?

[Baroness Vere of Norbiton (Con)]

The Government have published figures in accordance with the OBR forecasting period, which sets out exactly how this uplift will be met. The OBR forecast goes out to 2028-29, and obviously the uplift goes out further than that. For example, in 2028-29 there will be an extra £4.5 billion, which will be met through an increase of £1.6 billion in R&D spending and £2.9 billion from reducing headcount in the Civil Service to the pre-pandemic levels of 2019.

[Lord Wallace of Saltaire (LD)]

Can the Minister reassure us that it is the Treasury’s view that an increase in defence expenditure to 2.5% of GDP is compatible with the promise of further tax cuts, without further cuts in other public spending areas?

[Baroness Vere of Norbiton (Con)]

I can assure the noble Lord that this has no impact on our ambition to further cut taxes in future. We want to end the unfairness of double taxation of work—we have cut employees’ national insurance contributions by a third—so we do not see that this is incompatible.