The Chancellor, John Healey, will channel new defence investment through the National Wealth Fund and the British Business Bank, The Times reports. According to PA, which carries the report, both bodies would in turn invest in British defence companies.
The money would reportedly be funded by long-term borrowing. PA says it would not appear on the Treasury "scorecard", because the debt rule allows borrowing for investment in public financial institutions that can generate a return. The Times describes the investment as a "down payment" on Healey's ambition to spend 3% of GDP on defence.
The UK currently spends around 2.6% of GDP on core defence, according to the PA report. All Nato allies have committed to 3.5% by 2035. Healey's full path to 3% is still expected at the 2027 spending review.
The shadow chancellor, Andrew Griffith, said on Saturday: "By the end of his Budget statement, John Healey must have fully funded 3 per cent defence spending, or resign."
James Cartlidge, the Conservative shadow defence secretary, welcomed the plans. He told The Times the government had copied a Conservative policy, unveiled last December, to create a sovereign defence fund.
The Treasury has not confirmed the report or how the money would be treated under the fiscal rules.