In his recent Budget speech, Chancellor John Healey confirmed the government’s commitment to raising defence spending to 3 percent of GDP by 2030, emphasizing a determination to find “more innovative financing” methods to achieve this target. However, the challenge remains how to fund an estimated additional £11 billion annually without increasing taxes, borrowing more, or reducing expenditure elsewhere.

Healey’s approach echoes strategies used during Gordon Brown’s tenure as Chancellor in the early years of the New Labour government. Brown initially faced similar fiscal constraints after promising to maintain Conservative spending plans until 1999, complicating efforts to fund key public services such as the National Health Service and education. To overcome this, Brown expanded the use of the Private Finance Initiative (PFI), enabling private sector investment in infrastructure projects that the government would repay over time. Although PFIs later drew criticism for poor contract management and were reclassified as public debt by statisticians, they provided a means for the government to rapidly invest in public services during a period of fiscal restraint.

In contrast, Healey confronts a very different financial environment. Unlike Brown’s era, which benefited from a period of fiscal surpluses and falling debt, the current government has inherited high peacetime debt levels, elevated taxation, and a Labour Party resistant to cutting public spending under party leader Keir Starmer. This fiscal context limits options and complicates attempts to finance an expansion in defence spending through off-balance-sheet mechanisms.

To navigate these constraints, Healey announced the establishment of a new defence finance taskforce, tasked with exploring financing models that might include leasing military equipment from private investors. This approach bears resemblance to PFI arrangements, prompting concern among critics about potential long-term costs. John Foreman, a former military attaché, warned that such schemes, while attractive in the short term, often result in significantly higher expenses over time.

Defence Secretary Wes Streeting has sought to differentiate the current plans from past PFI models. Speaking to media, Streeting acknowledged his ongoing criticism of New Labour’s PFI but indicated that other private financing mechanisms, distinct from those criticized models, could offer value without controversy. However, he conceded that specific mechanisms remain in development and are yet to be disclosed.

Healey also intends to leverage partnerships with Finland, Poland, and the Netherlands through a newly proposed defence bank, as well as increased involvement by the national wealth fund and the British Business Bank. Nonetheless, these entities are subject to standard public-sector accounting rules, limiting the potential to circumvent fiscal constraints.

Experts emphasize that there is no “off the books” solution available to meet the 3 percent target, particularly since only on-budget expenditure counts towards it. While some question whether the 3 percent goal is appropriate, the government’s commitment means that either taxes will need to rise or non-defence spending must be reduced to balance the books. Healey and Labour figures like Andy Burnham appear committed to this target, leaving limited fiscal flexibility and no easy alternatives to meeting the defence spending increase.