Sir Keir Starmer is weighing up a borrowing spree to fund defence spending, The Telegraph understands.
The Prime Minister is considering several options to pay for the long-delayed defence investment plan (DIP), which will be published next month.
Months of negotiations between the Ministry of Defence (MoD) and Treasury have produced a package of about £18bn of increased spending to fund rearmament against the threats of Russia and China.
Whitehall sources involved in the process said final options had been laid on Sir Keir’s desk, including both substantial increases in government borrowing and major cuts in Whitehall.
However, Rachel Reeves, the Chancellor, has rejected calls to loosen her fiscal rules to fund the investment, arguing that the bond markets will lose confidence in Britain if she waters down her “iron-clad” commitment to reduce the national debt.
At the last Budget in November, Britain’s spending watchdog said Ms Reeves had a margin of £21bn of extra borrowing to remain within her fiscal rules, but that figure is likely to have fallen because of the war in Iran.
Sources said Sir Keir was likely to announce a combination of higher debt and spending cuts to fund the DIP, because paying for it through borrowing alone would leave the Treasury close to its fiscal limit.
The Telegraph understands that officials have set the Nato summit on July 7 as a “hard stop” deadline for the DIP to be published, amid fears that Sir Keir would otherwise arrive at the meeting empty-handed.
Donald Trump, who will also attend the summit in Turkey, has repeatedly called for Europe to increase military spending and take on the financial burden of defending the country by next year.
The DIP has been repeatedly delayed because of a battle between the MoD and Treasury over the size of the defence settlement and the source of the funds.
Senior military figures, including the three authors of last year’s Strategic Defence Review, have called on Sir Keir to speed up the process or risk leaving Britain vulnerable to Russian attacks.
Lord Beamish, the former defence secretary and chairman of Parliament’s intelligence and security committee, told The Telegraph that Downing Street must ignore domestic political considerations and publish the plan immediately.
“The threats we face won’t wait for the time scales of internal UK politics – this plan has got to be produced as a matter of urgency,” he said.
“It is not just in terms of our security but also, if we are going to build up our defence capacity and industry, they need certainty. The certainty can come when this plan is announced.”
The Telegraph understands that Ms Reeves has ruled out any increase in taxes to fund defence, or funding military spending with a so-called “defence bond”, proposed by the Liberal Democrats.
Officials also believe there is not enough time to raise money through a proposed “JEF bank” with northern European Nato allies, or a similar Canadian-led initiative, before the DIP is published.
Sir Keir has therefore been left with the “conventional” levers of borrowing or spending cuts to meet the £18bn commitment to prepare Britain for war.
Government sources said that he was unlikely to look for savings from the welfare budget, which would set up a showdown between No 10 and Left-wing backbenchers who forced an about-turn on benefit cuts last year.
It is understood that the DIP will not fulfil the most ambitious plans put forward in last year’s defence review, because of the state of the public finances.
However, sources said every element of the review would be addressed in the DIP, including a commitment to increase homeland defence and improve capability in the land, sea, air and space domains.
At the Nato summit, member states are likely to receive further requests for defence spending increases from Mr Trump, who ordered the withdrawal of 5,000 American troops from Germany and cancelled the deployment of long-range missiles earlier this month.