Defence: Finance
The question
To ask the Chancellor of the Exchequer, what recent assessment her Department has made of the adequacy of the use of Defence Bonds for financing military expenditure; and whether her Department has had recent discussions with financial investors on their issuance.
Answered by Darren Jones
As the Prime Minister announced in February, we are fully funding the path to 2.5% by reducing ODA spending. That is why we can announce a £10.9bn real-terms increase to the MOD budget over the Spending Review period. On top of this, we are recognising the contribution provided by our intelligence agencies on defence, in line with practice among our Allies. This means that in 2027-28 we expect to reach 2.6% of GDP
The increase in defence spending will be funded by reducing ODA from 0.5% to 0.3% of Gross National Income (GNI) by 2027, and reinvesting it into defence.
The government’s core gilt programme is the most stable and cost-effective way of raising finance to fund the day-to-day activities of the government, owing to the depth and liquidity of the market. This is, in part, down to the fungibility of the instruments issued to the market. Issuing bonds aimed at financing specific areas of spending risks fragmenting the gilt market, which would not be consistent with the government’s debt management objective of minimising the long-term cost of financing, taking into account risk.
The government keeps under regular review the introduction of new debt instruments. The government would however need to be satisfied that any new instrument would meet value-for-money criteria, enjoy strong and sustained demand in the long term, and be consistent with wider fiscal objectives.
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