Chancellor Rachel Reeves has resorted to cutting capital budgets across Whitehall departments to fund an increase in defence spending, after ruling out tax rises or additional borrowing. The move comes as the Ministry of Defence demanded an extra £18.5bn over four years, but was offered only £13.5bn – a shortfall that led Defence Secretary John Healey to resign.
The Treasury asked departments to pare about 1% off their capital budgets, a classic 'salami slicing' approach that sits uneasily with government promises to repair hospitals and schools. Reeves also pledged to use her department's reserve to cover £3.5bn of MoD projects. Treasury insiders defended the cautious approach, citing the MoD's history of profligacy and dismissing warnings from military chiefs as biased towards higher spending.
The funding gap highlights a broader dilemma for Prime Minister Keir Starmer, who has promised to increase defence spending to 3% of GDP in the next parliament and 3.5% by 2035. The three main options – spending cuts, tax rises, or borrowing – have all been ruled out politically. Spending cuts would require squeezing already tight budgets; tax rises would break manifesto pledges on national insurance and income tax; and borrowing risks higher interest rates from global investors.
Some experts, including former prime minister Gordon Brown, have suggested collective borrowing with Nato allies to fund defence, but the Treasury fears markets would treat this as additional debt. Others have proposed public investment schemes. However, with no political will for tough choices, the government has deferred firm decisions, leaving defence funding uncertain.
