Defence Spending Plans Could Force £12bn Tax Rise Under Labour

Labour’s shadow chancellor Rachel Reeves faces the prospect of implementing £12 billion in tax rises if the party wishes to boost defence spending to 2.5% of GDP whilst avoiding severe public sector cuts, according to leading economists.

The Resolution Foundation has calculated that meeting Sir Keir Starmer’s defence spending ambitions would require £6 billion in annual tax increases or spending reductions by the decade’s end. The situation becomes more complex when considering Labour’s commitment to prevent real-terms falls in Whitehall department budgets during this parliament.

Military chiefs are intensifying pressure on the Labour leadership, particularly in light of Donald Trump’s demands to increase NATO members’ defence spending to 5% of GDP. This mounting pressure places Ms Reeves in a challenging position, potentially forcing her to break her pledge against introducing additional borrowing or taxes mere months after implementing a substantial tax increase.

The Treasury’s current plans already suggest cuts of £8.4 billion to unprotected departments outside health and defence by 2029-30. The proposed defence spending increase would add approximately £6 billion to this figure, with two-thirds allocated to day-to-day military operations and one-third to capital expenditure such as warships.

Emily Fry from the Resolution Foundation emphasises the complexity of the situation, noting that “the public finances are already under strain.” Without improved economic conditions, the proposed defence spending increase would necessitate either new tax measures or deeper cuts to departments such as transport, housing, and justice.

The Institute for Fiscal Studies suggests that radical measures might be necessary to balance the books, including potential charges for GP appointments or post-16 education. These considerations arise against a backdrop of additional financial pressures, including court judgments related to Thames Water and previous government welfare reforms.