The Funding Dispute That Split the Cabinet
Chancellor Rachel Reeves faced a high-stakes budget dilemma when the Ministry of Defence (MoD) demanded an additional £18.5bn over four years to fund its investment plan. With no easy levers to pull—unlike Keir Starmer's earlier move to slash the aid budget, which cost him cabinet minister Anneliese Dodds—Reeves turned to a familiar Treasury tactic: trimming capital budgets across Whitehall departments by roughly 1%.
The approach clashed with the government's pledges to repair public services, from crumbling hospitals to overcrowded schools, and Reeves' own plans to use green energy investment to spur economic growth. To soften the blow, she also committed £3.5bn from the Treasury's reserve to cover MoD projects the ministry had expected to fund itself.
John Healey, the defence secretary, was unimpressed. After seeing the final offer—a £13.5bn uplift over four years—he resigned, viewing the package as inadequate and a form of penny-pinching. Treasury insiders, however, defended the decision, citing the MoD's notorious profligacy and questioning the severity of military chiefs' warnings, which they said have an inbuilt bias towards higher spending. They argued that the £13.5bn figure was only about £1bn a year short of the MoD's original demand, a gap they considered modest enough to justify Healey's departure.
Key Context
Healey's quiet fury came in the context of the wider argument about how the UK can fund rising defence commitments, including Starmer's vocal promise to spend 3% of GDP on defence by some point in the next parliament, and 3.5% by 2035. The strategic defence review called for a "national conversation" about how to proceed. Yet after two bruising tax-raising budgets, there is little political appetite in No 10 for more, and given the long-term nature of the defence commitment, the Treasury was happy to defer any firm decision for now.
Here, there are essentially three options: spending cuts, tax rises or borrowing, and Starmer has shown no political will to pursue any of them. First, spending cuts: the question is which spending. The Treasury had already squeezed departments in the run-up to the spending review; welfare cuts were botched last year and had to be reversed after a backlash from Labour MPs. Other costly spending commitments, such as the pensions triple lock, are ruled out for this parliament by the party's manifesto.
What Comes Next
Second, tax rises: £18.5bn over four years amounts to £4.5bn or so a year, or a bit more than 0.5p on the basic rate of income tax. But if the UK is serious about the 3.5% of GDP promise, it would have to move towards finding an eye-watering £30bn a year in additional spending over the next decade. That would be a major structural change in the makeup of public spending: effectively the reversal of the post-cold war "peace dividend" that helped fund the welfare state in the UK and across Europe. Given the magnitude of that pledge, Starmer could have started to make the argument that in this new, more dangerous world, the UK needed to be better defended—and the price was higher taxes. Perhaps that might mean revisiting Labour's manifesto tax promise not to touch national insurance or income tax.
Third, borrowing: Reeves changed the fiscal rules to allow for a significant increase in borrowing to fund investment, but with global investors already tending to charge the UK a higher interest rate than other large economies, the Treasury is reluctant to go further. There have been various suggestions for increasing borrowing collectively with NATO or European allies, or issuing "war bonds" to the public, but the Treasury fears markets would still view these as additional borrowing, potentially triggering financial penalties. For now, the government appears content to defer a firm decision, leaving the UK's defence funding future in limbo.
This funding crisis affects not only military readiness but also public services. The cuts to capital budgets across departments could delay repairs to crumbling hospitals and overcrowded schools, and undermine the chancellor's hopes of using investment in green energy to kickstart economic growth. Taxpayers may face higher taxes or reduced services if the government eventually chooses to fund defence through spending cuts or tax rises. The outcome will shape the UK's ability to meet its NATO commitments and respond to global threats.
Original reporting by The Guardian.
