Where is the enormous pile of cash for this coming from? Surely not the Exchequer?
In the scheme of things it's a significant amount of cash, but not an enormous amount of cash. Furthermore, it's the Cabinet, Parliament and the electorate that voted them in that decides, not the Exchequer.
As usual HM Treasury is not the enemy here. It will argue that healthy government finances are the "Fourth arm of Defence," and it will have a point, but in the end it is the elected government that decides how much to spend and what to spend it on, not the Treasury. It's job is to raise the money. Furthermore, I intend to show that a modest increase in defence spending over OTL is feasible without wrecking the government's finances.
This brings us on to who the actual enemies were, that is the British Government and the people that elected it. Many members of parliament were against spending money on armaments and so was a significant number of people who voted.
This is a quote from Page 127 of Grand Strategy Volume 1 - Rearmament Policy. It is about the announcement in July 1934 of RAF Expansion Scheme A, which IIRC only increased the gross Air Estimates from about £20 million a year to £24.5 million a year. I have put the relevant text in bold.
It is not unfair to end this story of the first deficiency programme on a note of bleak frustration. A balanced programme of £75 million had been amended to one only two-thirds that size, and so altered in distribution that the air gained at the expense of the other two arms for reasons far from convincing on military grounds alone however much they appealed to the general public. In his announcement to the House of Commons on 30th July, the Government spokesman, Mr. Baldwin, mentioned only the measures designed to strengthen the Royal Air Force. (110) And even this modest announcement was greeted by the Leader of the Opposition with the words
'We deny the need for increased air armaments'. (111)
Time for another spreadsheet.
British Government Revenue and Expenditure 1918-19 to 1939-40
See the reduction in spending around 1922-23. The Geddes Axe is noted for cutting government expenditure, but as the above shows the revenue was cut too. Therefore, ITTL it is possible to increase taxes back to "pre-Geddes" levels. However, it would have been electoral suicide for the government that implemented it to use the extra revenue to increase expenditure on armaments.
However,
@Cryhavoc101's pod coincides with the significant reduction in the cost of servicing the National Debt. This is probably what made OTL's rearmament financially possible later in the decade. ITTL a modest increase in defence expenditure in the period 1932-36 is feasible financially. However, as I have already written the political feasibility is a different matter.