If Britain must rearm, how to pay for it? Stiffen the sinews; summon up the taxes

The Guardian

07-03-2025

'A new era is upon us.' Ursula von der Leyen was not holding back. This is a world turned upside down, changed beyond recognition. Leaders across Europe are echoing the alarm sent out by the European Commission president, and rippling across the continent, Canada and elsewhere: that we face a 'clear and present danger on a scale that none of us has seen in our adult lifetime'. She has proposed a plan that would offer €800bn (£660bn) for immediate rearming, with a European sky shield to protect Ukraine.
The hooligan Russian asset in the White House has changed everything so profoundly that it is hard to keep track. The US, whose coat-tails we clung to, whose culture we revelled in, whose cleverness dazzled and stupidity confounded, is now the enemy. The shock feels viscerally personal because American culture is deep in our veins at all ages, from Sesame Street to Marvel, from Philip Roth to Philip Glass, the Oscars to Silicon Valley, like it or not. In Iraq and Afghanistan, we obediently followed their blunders, and 642 British soldiers died, as Keir Starmer adroitly reminded JD Vance in parliament. Our glamorous friend has turned fiend. How do we cauterise that off us? Or reconfigure the map of the world in terms of friends and foes?
Former UK ambassadors to Washington ruminated over this 'seismic' shift, which has shaken every norm from their Foreign Office days. 'This is not a blip in the relationship, something fundamental is going on,' one old knight warned a Lords select committee, while another cautioned that the US giving up on Europe in favour of Russia was likely a 'current reality'. Sir David Manning pinpointed Britain's specific anguish at this moment, the downside of the so-called special relationship: as Europe galvanises to rearm, unlike our continental neighbours, we depend on the US for our defence.
With every new shock wave, Britain feels this trauma in its marrow. Yet there is hesitancy in government about addressing the nation with a call to arms, as French president Emmanuel Macron has done, warning: 'the innocence of these 30 years since the fall of the Berlin Wall is over.'
Look at the remarkable response of Germany's chancellor-in-waiting, Friedrich Merz, lifetime financial conservative and fiscal dogmatist, as he grasps the severity of the times: he will reverse all his previous fiscal policies and his nation's usual dread over borrowing, breaking their 'basic law' with a huge €500bn loosening of debt rules to rearm. This amounts to 'one of the most historic paradigm shifts in German postwar history', according to Deutsche Bank. German borrowing costs shot up, but so have predictions of German growth from a sluggish 0.8% to 2%, with investors sending industrial stocks soaring. But note this: in his fiscal sea change, rearming will not be accompanied by any cuts to German social spending.
How about Britain? Our government has announced no change to fiscal policy. Living within our self-imposed straitjacket, our rearming will be paid for by cuts to aid, benefits and most departments, as Rachel Reeves this week sends her plans to the Office for Budget Responsibility to prove the books are balanced. Yet the promises the government has made are impossible to keep: no more borrowing, no more tax rises and no return to austerity. These are terrible choices – the aid cut already breaks a manifesto pledge – destroying trust whichever way Labour turns. But which is the least bad?
A copy of Duncan Grant's portrait of John Maynard Keynes hangs by my desk, a reminder to reach for his 1940 prescription How to Pay for the War, a book that spelled out the necessary financial sacrifices of the time. Emergency action needed then was draconian, rapidly increasing production while drastically reducing consumption, introducing rationing and diverting everything to the war effort. In comparison, what's needed in this new emergency is a pinprick, to raise the 3% of GDP for defence spending that Starmer is aiming for. Take just this one measure: in a disgraceful (and failed) act of crude election bribery, Jeremy Hunt cut 4p off employees' national insurance. Restoring that would cover the cost of this extra defence spending alone, says Ben Zaranko of the Institute for Fiscal Studies; so would 2p more on income tax for all.
Labour's Treasury team winces at the very thought of any further tax rises, after the walloping Reeves got for the £40bn tax rise in October's budget. They are jumpy: remember Liz Truss's mini-budget, maxi-catastrophe, they say. Look how even small tax changes such as the farmers' inheritance tax can create a storm; some policies make absolute sense in economic and fairness terms, but crash politically. Besides, tax rises that cut people's spending money risk stunting growth, they say – but then so do cuts to public spending. Borrow more? That adds to the mammoth £100bn a year we spend servicing existing debt, they say. But we are now on the hunt for the least-worst option – and Britain still pays less tax than similar countries.
Starmer has risen to the needs of the hour. But he has yet to address his citizens on what rearming means, and what it requires of them. We like to think of ourselves as warlike, and at the ready. We are good at displays of national pride and national parades, with a four-day celebration planned for the 80th anniversary of VE day in May. But tax and financial sacrifice were essential parts of that victory. The alternative – miserable cuts to benefits for the weakest, and stripping yet more from threadbare stricken public services – is the worst of all the bad options. In our finest hour, Britain shed its traditional tax-phobia. If ever there was a moment to stiffen the sinews and summon up the taxes, it is now: for the defence of the realm.
Polly Toynbee is a Guardian columnist