John Healey is poised to revive Britain’s bid to join an international banking scheme in order to boost defence spending, after his predecessor Rachel Reeves refused to back it.
The new Chancellor quit as defence secretary last month over the failure of Reeves and the Treasury to find enough money to pay for re-armament – a move widely thought to have been the final straw that forced Sir Keir Starmer’s resignation.
But The i Paper has learned that discussion about joining the Defence, Security and Resilience Bank (DSRB) – a Canadian-led scheme that helps member states finance defence projects at lower cost – took place within Andy Burnham’s transition team before he took office.
Now Healey, who was Burnham’s surprise pick for Chancellor, is expected to pick up the baton after he emerged that he had privately pushed for the UK join the DSRB when he was Defence Secretary.
A source familiar with the discussions said they expected the new government to “move on it.”
Burnham must find billions to meet defence promises
On his first day as prime minister, Burnham reaffirmed Britain’s commitment to raising defence spending to 3 per cent of GDP by 2030 while insisting his government would stick to its fiscal rules not to pay for day-to-day spending with borrowing and to bring down debt, and fully fund the country’s military ambitions.
That leaves ministers searching for ways to finance billions of pounds of additional investment without adding to pressure on the public finances.
Without identifying creative funding mechanisms, Healey will be left facing exactly the same kind of problems as his predecessor as he struggles to balance the books and fund defence. He will be under even more pressure, however, due to his previous criticism of the Treasury’s failure.
Joining DSRB could offer one option and has long been floated as an alternative way to fund defence spending, by pooling the resources of western countries in a multinational institution.
The bank will use its initial funding from member countries to finance defence companies, allowing members to fund military spending indirectly with debt that is not counted on national balance sheets.
However, the UK has so far refused to take after opposition from the Treasury, which under Reeves, was concerned about further borrowing in a new form that is not controlled by Whitehall.
Pressure for UK to be a founding member of the bank
Healey resigned as Defence Secretary in protest at the scale of the government’s Defence Investment Plan, arguing the funding fell well short of what the military needed.
In his resignation letter he pointed to “credible ways” of raising extra money, including working multi-nationally – a reference widely read as pointing to the DSRB. Treasury officials at the time countered that Healey had never formally submitted a funding request for UK membership.
Healey is understood to have viewed the bank as a way to help close the defence funding gap while also benefiting British defence firms.
Membership for the UK and other G7 states would carry an upfront cost of roughly £870m over three years – money Reeves was reportedly unwilling to commit, having ruled out extra borrowing for defence.
The Business Development Bank of Canada (BDC) has urged the UK to reconsider, calling on Britain to sign up not merely as a member but as a founding shareholder.
Isabelle Hudon, the BDC’s president and chief executive and Canada’s lead negotiator on establishing the DSRB, said the UK risked losing access to more affordable, accessible capital for its defence SMEs if it stayed out. “The UK should not only be a member of DSRB, but a founding member,” she said.
Hudon made the comments at an inaugural finance summit on the opening day of the Farnborough Air Show on Monday – the same day as Burnham entered Downing Street as Prime Minister.
Speaking to trade title The Banker on the sidelines of the airshow summit, she said she hoped the change of leadership in Downing Street would prompt ministers to revisit their earlier refusal to join, questioning how Britain could afford to stay outside the bank.
UK joined Finland and Netherlands in a rival scheme
A first roster of DSRB shareholder countries was unveiled on the sidelines of a Nato summit in Ankara earlier this month: Canada, Albania, Belgium, Greece, Latvia, Luxembourg, Romania, Turkey and Ukraine. Canada remains the only G7 economy to have formally backed the bank so far, though Canadian foreign minister Anita Anand said at the summit that the DSRB remained open to further members.
Earlier this year, the UK instead joined Finland and the Netherlands in proposing a rival scheme, the Multilateral Defence Mechanism, aimed at strengthening collective deterrence and increasing defence investment through joint procurement; Poland has since also signed up to that initiative.
Speaking to reporters at the Nato summit, Reeves said she hoped the DSRB would be merged with the Multilateral Defence Mechanism (MDM), a venture between the UK, the Netherlands, Finland and Poland, which allows the countries to procure equipment jointly.
“My preference would be to create one new institution that fulfils a number of purposes,” Reeves said, adding that for now they would remain “complementary”.
Any UK move to join the DSRB would have to be squared with the Treasury’s fiscal rules. Under the framework set by Reeves in 2024, day-to-day government spending must be covered by tax revenue under the “stability rule,” with borrowing permitted only for capital investment; a second rule requires net financial debt to fall as a share of the economy over the forecast period.
Those supporting the UK’s membership argue the upfront cost should be treated as investment – similar to the government’s stakes in bodies such as the National Wealth Fund or British Business Bank – rather than as day-to-day spending, meaning it could sit outside the fiscal rules.
Gordon Brown ‘had talks’ with Mark Carney about the plan
Liam Byrne, who chairs the Commons Business and Trade Committee, has written to Downing Street asking for the DSRB to be reconsidered in light of Healey’s resignation. Committee members visited Canada last month for talks on the project.
Gordon Brown, who advises the government on global finance, is also said to have held direct talks with Canadian prime minister Mark Carney on the plan.
War bonds are another potential option for governments seeking to raise money for defence spending.
They allow the state to borrow directly from investors, who buy bonds in return for regular interest payments and the promise of repayment at a set date.
Senior government officials said yesterday that neither membership of the DSRB or war bonds were something currently being “looked at”. There was no response to requests for comment from Healey or Streeting, the new Defence Secretary.
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