Andy Burnham, Britain’s soon-to-be prime minister, wants an array of bold new policies to attract voters who have grown tired of a Labour government mired in indecision and political backbiting. One idea is the issuing of war bonds.
The proposal was dismissed by outgoing Prime Minister Keir Starmer earlier in June, who told the House of Commons that war bonds would be “just another form of borrowing.” Yet Burnham, on course to become the new prime minister in the next three weeks, may be more receptive — one of his key advisers, former Bank of England chief economist Andy Haldane, has previously supported the idea.
War bonds would effectively be gilts, sold to the public, with the proceeds going straight to Britain’s creaking defense sector. The UK public is sitting on hundreds of billions of pounds in savings accounts and the theory goes that many people would be tempted by patriotic fervor — as well as tax breaks and the safety of government debt — to transfer some of their cash to a financial product that helps keep the country safe. Brits put about £70 billion ($92.5 billion) into independent savings accounts, known as ISAs, every year, as much as £20,000 of which is tax free. Much is in cash ISAs that can have low interest rates.
There’s considerable support for the idea in Parliament, where the Liberal Democrats — a centrist opposition party — has advocated for war bonds on 25 separate occasions since the turn of the year. Senior executives in the City of London are also keen, having suggested it to Chancellor of the Exchequer Rachel Reeves.
The funding of the military has become a thorny issue in the UK. John Healey resigned as defense secretary earlier in June, alongside junior minister Al Carns, arguing that the government’s planned increase in spending was insufficient to protect the country. A long-delayed investment plan will be published ahead of the North Atlantic Treaty Organization summit in July, with the government still considering ways to lift the spending boost above £13.5 billion. Some advocates of war bonds believe they could raise a further £20 billion.
Under the proposals raised by City economists, war bonds would be exempt from 40% inheritance tax. Gilts are also free from capital gains tax, so the policy should attract at least £10 billion in the first year and more after that, according to Nicholas Lyons, chairman of Standard Life Plc.
Lyons and Simon French, the chief economist at Panmure Liberum who floated the idea back in December, said the arrangement would give the government a cut-price way of borrowing and improve the resilience of the UK’s critical gilt market, around a third of which is owned by foreign investors.
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French said the government could issue tax-exempt 10-year war bonds with interest rates about 0.5 percentage points lower than standard 10 year gilts and still attract considerable retail interest. The arrangement would appeal to older generations with large savings in particular, especially after the Labour government imposed inheritance tax on pension assets and applied a surcharge to high value homes. However, such a policy would reduce inheritance tax revenues for future chancellors.
Officials in No. 10 Downing Street will lobby Burnham to take up the idea, according to the Guardian newspaper, but his advisers may be divided on the topic. While Haldane has supported the principle, ex-Goldman Sachs economist Jim O’Neill is more reticent.
Burnham himself has retreated from earlier suggestions that defense spending should fall outside the UK’s self-imposed fiscal rules and has vowed to stick with Reeves’ take on those rules — namely that day-to-day spending is met by revenues by the third year of the forecast, and that net debt should fall by 2029/30 as a share of the economy.
O’Neill has said Burnham would instead seek to use “flexibility” in the fiscal rules to increase spending on infrastructure projects that would boost growth. That idea was backed by Reeves this week who said “most defense spending is capital investment,” adding that a multilateral defense mechanism with European allies “will enable us to stockpile things like munitions off government balance sheets, which again enables us to do more upfront, because it is capital investment.”
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Burnham is supported by dozens of Labour’s left-wing MPs and has advocated higher public spending — so he’s unlikely to look for cuts in other departments when bulking up Britain’s defenses. That leaves borrowing or raising taxes, which have already increased substantially since Labour came to power in 2024.
A specialist debt-raise would have a timely precedent, following on from UK green bonds launched five years ago and extended to retail investors for the first time in March. Back in 2021, green energy was a key focus for the government and then-chancellor Rishi Sunak made a big political play of his bright idea, which went down well with investors. Today, the priority has moved from the environment to the battlefield and, with Burnham’s ascension, advocates of war bonds have a shot at turning their vision into reality.
Andy Burnham, poised to become the next Prime Minister of the UK, is advocating for a series of innovative policies to rejuvenate the Labour Party’s image and engage voters disillusioned by what they perceive as indecision and internal conflicts within the current government. One of his notable proposals is the introduction of war bonds, a concept that has sparked debate among politicians and economists alike.
The idea of war bonds was previously dismissed by outgoing Prime Minister Keir Starmer, who described them as « just another form of borrowing. » However, with Burnham’s impending leadership, there is a chance for a shift in perspective. His chief advisor, former Bank of England chief economist Andy Haldane, has been a proponent of such bonds, indicating potential support for the initiative.
War bonds would essentially function as government-issued gilts, sold to the public to raise funds for the UK’s struggling defense sector. The UK population currently holds substantial savings, with hundreds of billions of pounds in savings accounts. The rationale behind war bonds is that a patriotic appeal, combined with potential tax breaks and the security associated with government debt, could entice citizens to invest their savings in a product aimed at bolstering national security. Each year, approximately £70 billion ($92.5 billion) is deposited into individual savings accounts (ISAs), which allow tax-free contributions of up to £20,000, but often yield low interest rates.
The concept of war bonds has garnered significant backing within Parliament. The Liberal Democrats, a centrist opposition party, have pushed for this idea multiple times since the beginning of the year, and key figures in London’s financial sector have also expressed interest. They have suggested the proposal to Chancellor of the Exchequer Rachel Reeves, highlighting the growing concern over military funding in the UK.
Issues surrounding military funding have recently been exacerbated by the resignation of John Healey, the defense secretary, who, along with junior minister Al Carns, argued that the government’s planned spending increase was inadequate for national defense. A long-overdue investment plan is expected to be released ahead of the upcoming NATO summit in July, as the government continues to explore ways to exceed a £13.5 billion spending boost. Some advocates of war bonds suggest that the initiative could generate an additional £20 billion.
According to economic experts, the proposed war bonds could be exempt from 40% inheritance tax, and gilts are already free from capital gains tax. This structure is anticipated to attract at least £10 billion in the first year, with expectations of further growth thereafter. Nicholas Lyons, chairman of Standard Life Plc, and Simon French, chief economist at Panmure Gordon, argue that war bonds would provide the government with a cost-effective borrowing mechanism while also strengthening the resilience of the UK’s gilt market, which currently has a significant portion held by foreign investors.
French has suggested that the government could issue tax-exempt 10-year war bonds with interest rates approximately 0.5 percentage points lower than standard gilts, thus appealing to retail investors, particularly those in older demographics with substantial savings. This demographic has become increasingly sensitive to inheritance tax reforms affecting pension assets and high-value homes. However, the implementation of such a policy could potentially reduce inheritance tax revenues for future governments.
Despite the interest from various stakeholders, there seems to be internal disagreement among Burnham’s advisers regarding the war bonds proposal. While Haldane is in favor, economist Jim O’Neill expresses caution. Burnham has previously indicated a willingness to adhere to existing fiscal rules, which state that day-to-day spending must be covered by revenue within three years and that net debt should decrease as a percentage of the economy by 2029/30.
O’Neill has suggested that rather than strictly adhering to these rules, Burnham may seek to leverage fiscal flexibility to enhance spending on infrastructure projects aimed at stimulating growth. This idea received support from Reeves, who noted that much of the defense budget is categorized as capital investment. She also proposed a collaborative defense strategy with European allies to enable stockpiling of munitions off the government’s balance sheet, thus allowing for upfront capital investments.
Burnham’s position is further bolstered by support from numerous left-wing Labour MPs, who advocate for increased public spending. As such, he is unlikely to consider cuts in other sectors to fund the defense budget, which leaves borrowing or tax increases as the primary options for financing.
The concept of specialized debt issuance, like war bonds, finds a timely precedent in the UK’s green bonds initiative, which was launched five years ago and recently made available to retail investors. The government had previously emphasized green energy, and then-Chancellor Rishi Sunak’s efforts to promote green bonds were well-received by investors. Today, however, the focus has shifted from environmental concerns to national defense, and with Burnham’s ascent to leadership, there is a legitimate opportunity for advocates of war bonds to realize their vision.
