Keir Starmer has suggested Andy Burnham borrow billions more to cover the hole in the government’s defence investment plan (Dip), in a move economists say would severely reduce the likely next prime minister’s headroom against his fiscal rules.
The prime minister said on Wednesday that his successor – who is very likely to be the Makerfield MP – should use the headroom to fund a £4.7bn gap in defence spending over the next four years.
Starmer unveiled the Dip on Tuesday with an extra £15bn for weapons systems such as nuclear missiles and drones, but without having allocated money for all of the additional spending.
He told MPs at prime minister’s questions: “[The funding gap is] about £1bn a year over four years. Because of the decisions at the last budget, we’ve got headroom of £22bn. That is precisely so we can take decisions like this.”
Government sources say this would make little difference to the government’s fiscal position, given the Office for Budget Responsibility calculated earlier this year ministers had space to borrow an additional £22bn before hitting their limits.
However, economists say that the Iran war has already severely squeezed the government’s space to borrow more, and funding the defence investment plan would reduce it further.
Ruth Curtice, the chief executive of the Resolution Foundation, said: “The Dip will reduce headroom by around £2bn. On top of the impacts of the Iran war the new prime minister likely already starts with more than a third of their headroom eroded.”
Starmer’s plan, which is due to cost £298bn in total over four years, was given a muted welcome on Tuesday from military chiefs and government sources.
Burnham’s team has said he considers the plan now settled and will not seek to renegotiate it, despite concerns over how it will be funded. However, it emerged on Tuesday he was not told about the £4.7bn gap when briefed on the plan by the prime minister’s officials in recent days.
Government officials are now trying to work out where to make cuts to other departments’ capital budgets, including £2bn of reductions to the energy department.
Sources said on Wednesday that part of the money was likely to come from the government’s home insulation scheme, under which ministers plan to spend £15bn over the next three years to refit homes. The department says it has not yet decided where the cuts will be made.
Meanwhile, the Royal British Legion has warned about the consequences of pushing back funding to repair military housing, a decision officials said had been made to help pay for more drones.
The government’s defence housing strategy, published last year, found that nine in 10 defence homes needed to be modernised or upgraded, of which three in 10 require substantial refurbishment or complete replacement.
A spokesperson for the armed forces charity said: “It is vital the government honours its commitment to the £9bn defence housing strategy it announced a year ago.Readiness is not just about kit and capability; it is about the people we ask to serve and the families who support them. With overall satisfaction in service accommodation low, and personnel facing issues like damp and mould, we must ensure they have access to housing that supports modern family life.”
