This article forms the second part of a two-part series on rethinking rearmament. The first part, focusing on industrial requirements, can be read here.
North Atlantic Treaty Organisation (NATO) allies have declared a collective target of spending 5% Gross Domestic Product (GDP) on defence and security by 2035. By then, if the alliance attains its goal, the nations combined will spend US$4.2 trillion (£3.1 trillion) each year.
Private finance of all kinds is lining up, from venture capital to pension funds. They hold differing risk and tenor appetites, and as such appear to offer great opportunity for nations willing and able to manage such capital injection. Financing options that have not existed for decades are appearing, as are genuinely novel initiatives.
However, the single customer – the state – is challenged by finance, process and accounting. These are difficulties distinct from those faced by private companies, but they weigh heavily on how business can be done.
Some big numbers, although they can be bigger
European NATO deploying 3.5% of GDP solely on defence amounts to an additional US$350 billion (£258 billion) annually. If all NATO nations reach 5%, the combined additional annual defence and security spend will be US$2.7 trillion (£1.9 trillion).
5% of GDP is undoubtedly considerable. However, Ukraine currently spends nearly 35% of its GDP on defence, similar to the Allies’ expenditure throughout the Second World War. In wartime, such effort is not a matter of reallocating public spending within a fixed budget, but of mobilising the economy for national survival. Against that benchmark, a 5% peacetime commitment can be understood as a form of insurance: not to ‘compete’ with civilian activity, but to prevent a far costlier mobilisation from ever becoming necessary.
Such enormous investments in a single industry bring serious risks in terms of inflation, waste and corruption. These must be managed alongside the pressure to rearm at speed. The United States (US) is working to a 2027 deadline, based upon its assessment of the People’s Republic of China’s (PRC) intentions towards Taiwan.
NATO has no stated dates, but much reporting indicates a similar – if not shorter – threat horizon from Russia. Although the alliance is beginning to address the deficit, the Kremlin’s mobilised industry is producing ammunition at least twice – and up to four times – as fast as NATO nations combined, and around double the rate in more complex machinery, such as tanks, Armoured Personnel Carriers (APCs) and drones.
Spend, baby, spend
There is money available, and there is pressure to rearm — so where is the bottleneck? Several structural factors militate against rapid capital deployment and a sustained increase in defence production. The most fundamental is the state’s difficulty, as a near-monopoly buyer, in committing quickly and credibly to higher levels of spending.
Episodic demand and political reluctance to spend on defence have, over time, hollowed out industrial capacity. Production lines have closed and skills have atrophied. Layered on top of this are persistent cultural inhibitions towards defence spending, which manifest as punitive financing conditions and bureaucratic constraints ill-suited to long-term industrial investment.
Many free and open nations’ governments, notably those of the United Kingdom (UK) and France, have extremely constrained budgets. However, in 2025, Britain announced an expectation to spend 5% of GDP on defence and security against NATO’s agreed target date of 2035 (should financial conditions allow for this), with the projected split being 3.5% of GDP earmarked for core defence spending. France will increase spending at a similar rate, though from a base of 2% compared to the UK’s 2.3%. These two countries, and several others in NATO, are simultaneously grappling with decades of underinvestment, years of inflation and a need to modernise and expand their armed forces.
Debt levels vary across NATO, as do the levels of repayment. Britain spends around 7.7% of its GDP on interest payments; France around 3.4%; and Turkey around 11%. With such variation, some nations are showing less reluctance to spend and more imagination in how to service the payments. The Netherlands has proposed a ‘freedom tax’ on both citizens and businesses, which it anticipates will contribute an extra 25% to its defence budget. Germany has exempted defence spending above 1% from its debt brake calculations, and by 2030 will almost double its spend to €160 billion (£139.5 billion).
Genuinely new concepts for financing government spending include sovereign-owned international defence financing banks, akin to the World Bank. This idea hinges on being backed by many states and attaining a AAA rating.
As repeatedly learned, the bond market has a vote in what it regards as responsible and necessary borrowing and spending. It will also price military competence and credibility, because this secures the stability for a flourishing economy. Resilience, stability and security require investment, but equally they attract it.
Failure to demonstrate these characteristics will cause capital to flee. In an increasingly unstable world, genuine military strength and resilience should bring investor confidence, and thus economic power.
This virtuous circle can be challenging to start. Genuinely new concepts for financing government spending include sovereign-owned international defence financing banks, akin to the World Bank. This idea hinges on being backed by many states and attaining a AAA rating. Such an institution would lend weight to the credibility of increased borrowing for defence spending.
This is not a temporary fix, and will not solve all the challenges facing free and open nations, but it is a long-term initiative that can deliver serious change to their defence industries.
Build it and they will come
Free and open nations’ defence industrial capacity can also benefit from such an international bank. Coupled with the proposed institution’s AAA rating, its defence focus and expertise will allow it to provide debt or guarantees to allied defence industry at reasonable rates, acting as a backstop lender to banks and institutions traditionally unwilling to take greater risk. This missing link in the flow of capital to companies has been documented extensively. Properly financing the companies doing the work is critical to energising industry.
In addition, industries with no historical links to defence could be encouraged to find one. As previously elaborated in the author’s previous article on military requirements and manufacturing, many industries have the skills and capacity for military equipment. To unlock this, requirements must become less bespoke, and be constructed with knowledge of existing machinery. Automotive manufacturers, for example, are expanding into defence manufacturing, as they did in the Second World War.
The valley of death and historic hangovers
Any investment fund follows its own guidance for returns and the types of investments desirable and permitted. Venture capital and private equity have different risk and return profiles to each other, which in turn differ from those of pension funds and private credit. Ultimately, all defence turns on a single buyer and its issuance of contracts.
The Ministry of Defence’s (MOD) procurement processes (like those of many other countries) not infrequently stifle – sometimes to the point of failure – defence companies possessing great technology and people for want of a contract. These contractual deserts must be addressed, and the responsibility for changing buyer behaviour and risk tolerance lies in the National Armaments Director (NAD) Group.
In the private sphere, many institutions, including British banks, have explicitly excluded defence from their permitted investments. The Financial Conduct Authority frequently receives criticism that its Environmental, Social and Governance (ESG) guidelines proscribe defence – so much so that it issued a statement in early 2025 to explain that it saw no such constraint.
As such, adding ‘Security’ to ESG has been suggested. However, ‘ESSG’ is at least as likely to devalue the entire classification as it is to attract more capital, as the kinds of investors who prize high ESG scores are often those who wish to exclude defence industry. More pragmatic approaches have expanded ‘Social’ to include national resilience – possibly a middle path.
More worryingly, accounting rules have changed after a series of private finance initiatives and public-private partnerships which were seen as poor value for money. These now effectively rule out meaningful long-term financing ambitions for infrastructure and equipment. Modern accounting rules – including International Financial Reporting Standards (IFRS) 16 lease standards – frontload the recognition of long-term commitments on the public balance sheet. While cash payments may be spread over decades, the associated liabilities are recognised upfront, immediately worsening reported debt and fiscal ratios.
The sovereign is the ultimate risk-taker and financial backer, and should be able to manage its long-term financing obligations differently.
As infrastructure or fighter jets, for example, endure a long time and have very small residual value, huge sums must be spent in very constrained periods. The accounting treatment creates a powerful disincentive for governments to enter into long-term defence contracts or innovative financing structures, even when doing so would be economically rational.
Without wading further into accounting and cash flow rules, it is enough to understand that rules which seem sensible for private companies that could default are not perfectly suited to the construction of national public infrastructure. The sovereign is the ultimate risk-taker and financial backer, and should be able to manage its long-term financing obligations differently. Furthermore, state-owned bodies, such as the National Wealth Fund and British Business Bank, could also offer new capital and management strategies. It is not impossible to generate revenue from nuclear shipyards, but the state will need to think and act differently.
A battle of wills
To paraphrase the Great Prussian Carl von Clausewitz, much will come down to a question of will. The levers are held, but using them effectively will require government, civil service and private capital to act differently. Often, free and open nations find themselves respecting accounting practice or procurement processes as if they were atomic weights. To incorporate this vastly expanded capital requirement, and indeed availability, much will need to change – but only the rules of defence finance, not the laws of physics.
Wg. Cdr. Ben Goodwin MBE is an Adjunct Fellow at the Council on Geostrategy and a fighter pilot with experience in Iraq, Syria, Afghanistan, Eastern Europe and Central Africa. He has been posted to the Ministry of Defence and the North Atlantic Treaty Organisation in Brussels. Previously, he worked at the trading arm of a large bank, focused on foreign exchange and government bonds.
This article was written by the author in a personal capacity. The opinions expressed are his own, and do not reflect the views of HM Government or the Ministry of Defence.
To stay up to date with Britain’s World, please subscribe or pledge your support!
What do you think about this Memorandum? Why not leave a comment below?
One of the long standing tendencies amongst senior Whitehall officials is to assume that the private sector is more efficient. That may often be true, but when it comes to financial rules this memorandum is spot on. As Harry Fullerton has pointed out (https://wavellroom.com/2025/04/23/marching-below-critical-mass-army-change/) Resource Account Budgeting is not an effective or efficient rule for the military. Penalising a military organisation for having large stockpiles is sub-optimal. Most of the increased funding for MoD is in Capital spending (aka CDEL) not Resource spending (RDEL). This means relying on new and often unproven technology to make up for the lack of personnel. Of course Ukraine has shown how this can be done, but they still need a lot of people in uniform.