The Liberal Democrats are calling on the government to start issuing “war bonds”, a scheme the party says could raise up to £20bn to bolster the military.

Under the plan, members of the public could loan the government money in the form of a bond which would run over a two-to-three year period and pay out the same interest as standard government bonds.

Liberal Democrat leader Sir Ed Davey said the bonds would “give ordinary people the opportunity to contribute to Britain’s security”.

A spokesperson for the government said “new debt instruments” were kept under review but that they had to represent “value for money” and “be consistent with wider fiscal objectives”.

Calls to increase defence spending have intensified in recent years, following Russia’s full-scale invasion of Ukraine in 2022 and the election of US President Donald Trump, who has frequently criticised Nato countries for failing to spend enough on their military.

The Labour government has pledged to raise overall defence spending from 2.3% to 2.5% of national income by 2027, at an estimated cost of an additional £6bn a year.

It has also promised to raise levels to 3.5% by 2035, in line with a pledge by Nato members last year.

However, there have been reports in the Times and the Sun that plans to make Britain’s armed forces “war ready” will require £28bn more than has so far been allocated.

The government had been due to publish its defence investment plan last autumn but there are suggestions it has been delayed due to concerns about cost.

Earlier this month, the head of the Armed Forces Sir Richard Knighton said the UK was “not as ready as we need to be for the kind of full-scale conflict we might face”.

Setting out his party’s proposal, Sir Ed said: “Now is the moment to be clear-eyed about the threats facing Britain – Vladimir Putin is waging war in Europe while Donald Trump is tearing up the rules and alliances that keep us safe.

He said Britain and its allies “must rapidly strengthen our defences to deter the likes of Putin… it is much better to invest now in deterring a war than having to fight one”.

The Liberal Democrats said the money raised from issuing bonds would be ring-fenced for defence and the investment would help deliver “growth, jobs and higher revenues” for the government “which would partially offset the cost of additional debt servicing”.

The party added the scheme would need to be accompanied by an overhaul of the Ministry of Defence procurement process, which has previously been criticised as wasteful.

Their proposal, the party says, would be similar to the bonds scheme used during World War One and World War Two.

Individual citizens could lend the government money, which would be paid back in six to 10 years with interest. By the end of 1945, the scheme had raised £1.754m.

Posters encouraging members of the public to buy bonds – or national savings certificates – used slogans including “lend to defend” and “feed the guns with war bonds”.

Dan Coatsworth, head of markets at investors AJ Bell, said: “War bonds are a proven way of raising money to fund national defence spending, but they can burden a government with long-term debt.

“In theory, the public might demand a better rate of interest than they could get on cash in the bank to take up the bonds.

“While some people might think it is their duty to support the country, there will be others who treat such a bond in the same way as any type of investment.”