Quantitative Easing, Keynesian Defence Spending and the Political Failure of Imagination in Britain

By Matthew Parish, Associate Editor

Wednesday 24 June 2026

One of the most striking features of British economic policy in the first half of the 2020s was the persistence of fiscal caution in an era that appeared to demand strategic ambition. The government led by Keir Starmer inherited a country facing stagnant productivity, under-invested public services, deteriorating infrastructure and mounting geopolitical dangers. Nonetheless Britain possessed one of the most powerful monetary institutions in the world, the Bank of England, which had already demonstrated during previous crises its capacity to create substantial quantities of money through quantitative easing. Yet this monetary capability remained largely disconnected from a coherent programme of national renewal.

The question is therefore not whether quantitative easing was possible. It clearly was. Rather, the question is whether a government led by Starmer could have deployed quantitative easing, directly or indirectly, to support Keynesian-style investment programmes, particularly in defence and industrial development, and whether its failure to recognise that possibility contributed to its political difficulties.

Quantitative easing, in its simplest form, involves a central bank creating money electronically and using it to purchase financial assets. The conventional justification is that this increases liquidity, lowers borrowing costs and stimulates economic activity. Following the global financial crisis of 2008 and again during the COVID-19 pandemic, hundreds of billions of pounds were created through such programmes. The principle that governments operating their own currencies possess substantial monetary flexibility was therefore demonstrated in practice, even if many politicians remained reluctant to acknowledge it openly.

The traditional objection to using quantitative easing to finance public expenditure is the fear of inflation. History contains numerous examples of governments printing money irresponsibly, resulting in currency collapse and economic instability. Yet the British economy of the early 2020s was not characterised primarily by excess demand. Rather, it suffered from weak investment, sluggish productivity growth and persistent regional disparities.

Under such circumstances, Keynesian economists would argue that carefully targeted public spending can increase productive capacity and stimulate economic activity without necessarily generating destructive inflation.

Defence spending represents a particularly interesting example. Unlike some forms of public expenditure, defence investment often creates long-term industrial capabilities. Shipyards, aerospace manufacturing, electronics production, cyber-security systems, artificial intelligence applications and advanced engineering all generate skilled employment and technological innovation. Historically, military expenditure has frequently served as an engine of industrial modernisation. The United States during the Cold War provides perhaps the most obvious example, with defence research contributing to developments ranging from semiconductors to satellite communications and ultimately the internet itself.

Britain entered the middle of the decade confronting the largest military threat to European security since the end of the Cold War. Russia’s invasion of Ukraine exposed deficiencies throughout European defence industries. Stockpiles of ammunition proved inadequate. Manufacturing capacity was insufficient. Procurement systems were slow and fragmented. There was therefore a compelling argument for a substantial programme of defence-industrial expansion.

Had the government embraced a more ambitious Keynesian philosophy, it might have argued that investment in defence manufacturing was not merely military expenditure but national economic development. New factories could have been established in areas suffering from deindustrialisation. Apprenticeship programmes could have addressed skills shortages. Research and development spending could have stimulated technological innovation. A strategic narrative could have emerged linking national security, economic growth and industrial revival.

The role of quantitative easing in such a programme would have been indirect but significant. The Bank of England could have maintained lower borrowing costs through asset purchases while the government financed long-term investment through bond issuance. Alternatively, more innovative arrangements might have been considered, including targeted purchases of bonds linked to infrastructure or industrial projects. Such proposals remain controversial, but they are hardly unprecedented in international economic history.

Whether this would have been economically successful is open to debate. Reasonable economists disagree about the limits of monetary expansion and the risks of inflation. However, politics is often shaped as much by perceptions of possibility as by technical economic calculations. The Starmer government frequently appeared trapped within assumptions inherited from an earlier era. Fiscal rules, debt targets and Treasury orthodoxy dominated public discussion. The result was a government that often spoke the language of caution at a time when many voters were seeking evidence of boldness.

This was particularly problematic because the electorate had become increasingly sceptical of incrementalism. After years of economic stagnation, many voters no longer wished to hear that substantial improvements would require decades of careful management. They wanted visible change. They wanted growth. They wanted functioning public services. They wanted evidence that political leaders possessed a plan equal to the scale of contemporary challenges.

A government willing to articulate a vision of monetary flexibility supporting strategic national investment might therefore have transformed the political debate. Such a government could have argued that Britain was not poor in any conventional sense. She possessed a sophisticated financial system, an internationally traded currency, world-class universities, advanced industries and considerable institutional capacity. The problem was not the absence of resources but the failure to mobilise them effectively.

Starmer’s political difficulties cannot of course be reduced to a single economic question. Governments rise and fall for numerous reasons including leadership, communication, international events and party management. Nevertheless his administration often seemed constrained by an unusually narrow conception of what economic policy could achieve. It accepted many of the assumptions of its opponents regarding fiscal restraint and public borrowing. In doing so, it surrendered the opportunity to present a more transformative vision of national renewal.

The deeper lesson concerns political imagination. Throughout modern history, successful governments have often emerged during periods when leaders recognised possibilities invisible to their contemporaries. The post-war reconstruction of Britain, the American New Deal and the great industrial transformations of East Asia all involved governments willing to think beyond prevailing orthodoxies. Whether quantitative easing could have financed a major programme of Keynesian defence-led growth is ultimately a technical question. Whether Britain needed leaders capable of asking such questions is a political one.

The tragedy for Starmer may therefore have been less an economic failure than a failure of imagination. At a moment when Britain confronted profound strategic and economic challenges, his government possessed access to extraordinary monetary tools but lacked the confidence to integrate them into a compelling national project. In politics, opportunities missed are often more consequential than mistakes made. A government that appears unable to imagine a different future rarely succeeds in persuading voters that it can create one.