REARMING BRITAIN'S SUPPLY SIDE

REARMING BRITAIN'S SUPPLY SIDE Alexandros Xenofontos

Healey has brought the defence-funding dispute into the Treasury, despite Burnham’s focus on domestic priorities. The £15bn DIP uplift offers a modest near-term boost; the larger return depends on private investment and R&D. Manchesterism and BoE easing could support that response, while Gilts judge the capacity created against the borrowing required.

Burnham’s unspoken theory of economic revival may now be taking shape around defence. The Greater Manchester model uses public procurement to give firms the confidence to invest, while planning, skills, transport, and housing help workers and businesses build around that demand. Burnham has placed little public emphasis on defence investment, yet his appointment of John Healey as finance minister (Chancellor of the Exchequer) suggests that incremental military spending could become the central government vehicle for a national rollout. The current Defence Investment Plan (DIP) adds only £15bn over four years and is financed largely through reallocations, leaving a modest near-term growth impulse. But, the stronger case rests on predictable orders “crowding in” private investment and R&D - with further success relying on cheaper energy to industrial consumers and Bank of England easing, as inflation permits. The UK government bond market will judge the productive capacity created against the additional borrowing, imports and cost pressure.

John Healey resigned as Defence Secretary after concluding that the DIP was inadequately funded and poorly configured for the wars Britain was preparing to fight. Five weeks later, he controls the Treasury. Andy Burnham has appointed him Chancellor and described the decision to NATO Secretary- General Mark Rutte as a “signal of intent”, despite entering Downing Street with an agenda centred on household support, stronger public control and reindustrialisation through public procurement. Defence featured as an international obligation that Burnham’s domestic reforms would allow Britain to honour, rather than a defining priority of the new government.

Healey’s position is harder to reconcile with continuity. He argued that the DIP lacked the scale, speed and mix of capabilities required, but can now no longer blame the Treasury for blocking additional resources. As Defence Secretary, he also supported UK participation in the proposed Defence, Security and Resilience Bank(DSRB), with his allies claiming that the Treasury tried to close down the initiative. His successor, Wes Streeting, has already made reconsidering membership an “early priority”, citing

the prospect of cheaper and more accessible finance for defence SMEs. Healey now controls the institution that resisted his proposal.

NATO 2026 SPENDING NEEDS TO RAMP UP TO MEET THE 3.5%… 24 JUL 2026

An extra 1.5% is earmarked on defence and security related areas such as critical infrastructure, resilience, networks and defence industry.

Higher defence spending has therefore become more likely, although its place within Burnham’s wider programme remains unresolved. The most plausible route is to present rearmament as part of the government’s industrial strategy, with military orders supporting British production, regional employment and new technology. The immediate GDP effect should remain modest because the uplift is relatively small and partly funded by cuts elsewhere. The larger opportunity comes from using predictable public demand to induce firms to invest, expand capacity and develop technologies that spread beyond the defence sector.

Creating the incentive to invest

The £297.7bn headline is the MOD’s entire four-year budget, while the DIP adds £15bn to the 2025 Spending Review settlement over the four years to 2029/30. The government has identified £10.3bn of funding that includes a 1% contribution from other departments’ capital budgets providing £4bn, with separate, additional savings of £2bn from the energy department and £800m from the transport department (of which £700m from road funding). £1.1bn comes from the MOD asset sales and internal funding reprioritisation, while £2.4bn reflects Treasury support and procurement savings. A…