Reeves should bend fiscal rules and borrow to fund defence, says Labour grandee

Increased defence spending should be funded from extra borrowing, a Labour former Cabinet minister has said, as he urged the Chancellor to “break free from Treasury orthodoxy”.

Peter Hain argued the need for Rachel Reeves to bend her fiscal rules, given the “exceptional, and exceptionally dangerous, times” now faced by the UK.

Lord Hain said borrowing had been used by Britain to rearm in the run up to the Second World War, and without it “Hitler would have won”.

Lord Hain told Parliament the arrival of Donald Trump in the White House had “transformed everything”, and the current military threat in Europe demanded Britain and its allies do whatever was needed to restore security.

The additional borrowing could be underwritten by issuing defence bonds, he suggested.

Prime Minister Sir Keir Starmer has already announced spending on defence will rise from its current 2.3% share of the economy to 2.5% in 2027, funded by cutting overseas aid.

The Labour leader has also said he wanted the figure to reach 3% of gross domestic product during the next Parliament.

Meanwhile, the Chancellor has said she will not budge on her self-imposed rules on borrowing as she seeks to stabilise the public finances.

But speaking during the Finance Bill in the upper chamber, Lord Hain told peers: “The election of Donald Trump has transformed everything.

“As well as facing the biggest military threat to peace in Europe since the Cold War, and without US backing, we are now in the opening stages of a trade war that could cause a global slide into slump.”

He said Germany and the EU had changed their fiscal rules to accommodate a hike in military spending.

Lord Hain added: “Our UK Labour Government is rightly also increasing defence spending, albeit financed by a humongous cut in overseas aid.

“But nobody seriously thinks we can leave it there. Nor that we should cut frontline services like health, education or policing.

“We must make sure that extra defence spending delivers faster domestic growth too, so that a bigger GDP funds our other pressing priorities.

“The financial markets have to grasp why today’s new security threats warrant increased defence spending financed by extra borrowing, like all our European partners are doing.”

He went on “Our Labour Government’s duty, together with our partners, is to do whatever it takes to make Britain and Europe safe again.

“That means modifying our fiscal rules for these exceptional, and exceptionally dangerous, times.

“If we hadn’t done something like this in the Second World War, Hitler would have won.”

Lord Hain said: “Extra borrowing for defence purposes only could be made possible by issuing special purpose financial vehicles like defence bonds up to set limits, as some of our European allies already have in mind.

“The key will be a steady expansion of defence procurement, not a sudden splurge which could benefit US defence contractors but leave British suppliers out in the cold.

“I very much hope that the Chancellor will break free from Treasury orthodoxy and do this.”