Why War Bonds Could Be Britain's Answer to Soaring Defence Costs

As global security tensions escalate, Britain faces an unprecedented dilemma: defence spending requirements are skyrocketing while traditional budget sources struggle to keep pace. In recent international forums, leaders have warned that without substantial increases in military expenditure, nations may face difficult choices about their strategic positioning. War bonds—a financing mechanism nearly forgotten since the early 20th century—have reemerged as a potential solution to this funding crisis. But can this historical tool address modern fiscal realities, and what would it actually mean for British taxpayers and investors?

The Defence Funding Crisis Nobody Expected

The numbers tell a stark story. According to NATO commitments confirmed last summer, the UK must elevate its defence spending from 2.4% to 5% of GDP by 2035. This translates to £32 billion in additional annual spending (in today’s terms) allocated to core military needs—weaponry, modernization, and readiness. The Office for Budget Responsibility has characterized this as roughly equivalent to another major tax increase across the entire economy.

The challenge extends beyond raw figures. The Ministry of Defence has already cautioned that modernizing the armed forces could leave a £28 billion shortfall even with creative accounting. Speaking at recent high-level gatherings, Alistair Irvine from Jupiter, a prominent investment firm, has argued that reaching the 5% target by 2030—rather than waiting until 2035—is essential to demonstrate credible deterrence rather than appearing to depend on allied military capacity.

The situation is complicated by how governments try to stretch definitions. Some nations have proposed including energy security investments, port improvements, and even railway projects as components of their defence spending calculations. While technically inventive, these accounting adjustments mask a fundamental truth: genuine military capability requires substantial real expenditure that cannot be obscured by reclassifying existing budgets.

War Bonds: How Britain Funded Military Efforts Before

The concept of war bonds is not new to the UK. During World War I, the British government pioneered this mechanism, encouraging citizens to contribute portions of their wages through patriotic appeals. Iconic wartime advertisements—featuring images of troops and military hardware alongside the memorable phrase “Your bobs do big jobs”—mobilized public investment in the war effort.

These bonds were theoretically intended to be repaid within a decade. In practice, settlement proved far more protracted; some loans persisted until 2014, when George Osborne, then Chancellor of the Exchequer, finally discharged the final obligations remaining from WWI-era issuance.

Irvine proposes that the UK could issue up to £120 billion in new debt through a National Defence Loan—war bonds dedicated specifically to military purposes and legally restricted to that use. This approach, he argues, offers an alternative to broad-based tax increases or politically toxic spending reductions elsewhere. Some Labour Party figures, including former shadow chancellor Ed Balls, have suggested that defence spending should be treated as a temporary exception to standard fiscal rules, given the unique strategic circumstances.

Can War Bonds Compete with Modern Borrowing Challenges?

The appeal of war bonds is straightforward: they would fund essential defence needs without imposing immediate tax burdens on an already-stretched public. However, financial markets operate according to different logic than patriotic sentiment.

The UK’s current fiscal position creates constraints. National debt already equals the entire annual output of the economy, and annual interest payments alone are projected to exceed £100 billion indefinitely. This debt burden is already more substantial than that of Germany, Italy, France, or the United States relative to economic capacity. Investors—particularly large institutional funds managing pension assets or hedge fund portfolios—will not accept returns on war bonds significantly lower than what other government borrowing offers, regardless of the underlying purpose.

Matt Amis, investment director at Aberdeen, a major financial institution, emphasizes a critical point: “It’s not the name that matters, but the financial offering.” While some retail investors might accept modest returns on patriotic grounds, the institutional money required to meaningfully fund a £120 billion issuance operates under fiduciary constraints demanding competitive yields.

Structuring war bonds as “green bonds”—a category already established in financial markets—could theoretically provide a built-in investor base through passive investment mandates. However, this advantage comes with a cost: existing debt sales by the UK Debt Management Office already require issuing £300 billion annually in new and restructured borrowing. The market absorption capacity for additional large issuances remains uncertain. Moreover, British borrowing costs already exceed those of competitors like Germany, France, and the US; issuing more debt would likely push yields upward, increasing the cost of all subsequent government borrowing across the economy.

What History Teaches Us About Bond Issuance

The historical record offers cautionary lessons about war bonds that modern policymakers cannot ignore. Bank of England archives reveal that the first war bond auction during World War I failed to attract expected uptake. Rather than publicize this disappointment, officials employed a financial sleight of hand: senior staff purchased bonds under their own names, with these purchases then classified on official balance sheets as “other securities,” disguising the actual level of retail investor participation.

While this historical episode did not destabilize the broader economy, it illustrates a persistent tension: when patriotic appeals prove insufficient to attract investment, government institutions face pressure to misrepresent market conditions. Inflation subsequently eroded much of the real value these bonds offered, meaning early investors suffered substantial losses in purchasing power despite nominal repayment.

The modern environment presents both advantages and disadvantages compared to WWI. Purchasing government securities today is considerably easier and more tax-efficient; retail investors can acquire gilts (British government bonds) with capital gains exemptions. Bank of England data suggests that retail investors comprise approximately 4% of all gilt purchases, predominantly favoring short-term instruments—a pattern that could theoretically support shorter-maturity war bonds.

Yet Amis cautions that structural change cannot overcome fundamental market dynamics. Borrowing costs are a mechanical consequence of supply and demand, not patriotic sentiment. As more debt enters the market, yields must rise to attract investors. This is not a matter of opinion or policy choice, but rather how financial markets function across all developed economies.

Beyond Patriotism: The Real Financial Question

Rob Murray, who leads the Defence, Security and Resilience Bank, has highlighted another overlooked consequence: if NATO allies simultaneously increase defence spending toward 5% of GDP targets, global military expenditure would rise by approximately $1.9 trillion annually. This flood of new demand for defence equipment—from artillery shells to advanced tanks—has already begun driving prices upward dramatically. The cost of 155mm artillery shells has quadrupled since 2022, and German Leopard 2 tank prices have surged recently.

If this spending surge occurs without corresponding productivity improvements or increased manufacturing capacity, the result may be inflation rather than enhanced military capability. War bonds, under these circumstances, might finance higher prices rather than greater defensive strength.

To preserve investor confidence and ensure funds achieve their intended purpose, Irvine recommends that any new defence bonds include strict legal ring-fencing: penalties for failing to meet specified spending targets, transparent accounting of how proceeds are utilized, and conditions preventing reallocation to other government priorities. Some financial professionals see merit in this approach, acknowledging that procedural restrictions could enhance investment appeal—though investor returns and market yields remain the ultimate determining factors.

The Path Forward: Pragmatism Over Romance

War bonds represent one possible tool within Britain’s broader range of financing options for rising defence expenditure. They carry genuine historical precedent and could appeal to certain investor segments motivated by both financial return and strategic purpose.

Yet they are not a magic solution that bypasses market realities or eliminates difficult choices. Whether pursued through traditional tax increases, spending reallocation, modified fiscal rules, or war bonds, funding significantly expanded defence capacity requires genuine economic resources. Investors will price these instruments according to risk and opportunity cost, not according to the patriotic narrative surrounding them.

The urgent question facing British policymakers is not whether war bonds can replace other difficult decisions, but rather whether they might contribute meaningfully to a diversified funding strategy. At a moment when global security challenges are intensifying and allies are watching whether the UK meets its commitments, the financial mechanisms used to fund deterrence may matter less than the political will demonstrated through action itself.