A proposal to boost Treasury revenues through increased North Sea oil and gas drilling as a means to fund rearmament has been blocked, according to government sources. The initiative, aimed at addressing the £18 billion funding gap for the Ministry of Defence’s delayed Defence Investment Plan (DIP), was reportedly supported by Treasury Secretary Rachel Reeves but ultimately vetoed by Energy Secretary Ed Miliband.

The Treasury modelled the plan, which involved expanding drilling activity to generate tax income sufficient to cover a significant portion of the defence budget shortfall. However, a Cabinet source indicated that Miliband opposed the measure, causing frustration within government circles. The veto is said to have stalled approvals for key oil and gas projects, including the multi-billion-pound Rosebank and Jackdaw fields, which could potentially create thousands of jobs.

“There was fury at Ed Miliband’s block on more drilling,” the source said, alleging that Miliband slowed decision-making on the projects despite support from Scottish Labour and other Cabinet members. The source also linked Miliband’s stance to recent Labour setbacks in the Aberdeen by-election.

Miliband’s allies deny that he was specifically consulted on using North Sea revenues to fund defence and claim his discussions with Downing Street focused on proposed cuts to his department’s capital budget. A spokesperson for Miliband dismissed the report as “completely untrue.”

The dispute over North Sea drilling has also stirred tensions within the Labour Party. As Miliband appears poised to succeed Reeves as Chancellor in a potential Andy Burnham-led government, his refusal to lift restrictions on new drilling licences is reportedly damaging his standing. Burnham, the frontrunner to replace Sir Keir Starmer as party leader, is reportedly concerned that siding with Miliband’s approach could make him appear overly ideological.

Some Labour MPs representing constituencies in traditional voting strongholds expressed concern about the speed of the party’s transition to a green economy. One MP cautioned that rushing the move away from oil and gas could risk job losses and higher energy prices. Others have voiced preference for Reeves remaining in post, citing her ability to command greater investor confidence.

The disagreement also pits Miliband against influential unions such as GMB and Unite, as well as energy sector executives. A Cabinet source suggested that Miliband’s stance was alienating investors and unions alike, potentially driving capital away.

Analysts and industry experts have estimated that opening up North Sea oil and gas with a tax regime similar to Norway’s could raise between £10 billion and £13 billion by 2030. Supporters within the government remain hopeful this funding option could be revived as Sir Keir Starmer seeks to finalise the DIP after nine months of delay.

Despite these hopes, sources indicate that discussions involving the Ministry of Defence, Downing Street, and the Treasury currently exclude the North Sea proposal. Meanwhile, Andy Burnham is reportedly exploring alternative avenues to increase defence funding.

Sir Keir has pushed for publication of the defence budget within the next two weeks, ahead of the NATO summit scheduled for early July, defying calls from Burnham to delay publication until his successor takes office. The Prime Minister affirmed his commitment to finalising the plan in coordination with the Defence Secretary.

Earlier this year, Reeves reportedly assembled a package including North Sea development alongside difficult departmental budget cuts to generate additional defence funding. This plan was shelved following Miliband’s opposition. Subsequent defence funding offers fell short of Ministry of Defence requests, contributing to the resignation of former Defence Secretary Richard Healey, which triggered a leadership crisis within the party.

Whitehall departments have been instructed to identify further budget savings to support defence spending. The Treasury declined to comment on the matter.