UK could face up to £30bn of tax rises to fund defence spending boost, economist says

Independent

20 hours ago

Rachel Reeves could be forced to raise up to £30bn through tax rises or funding cuts as the chancellor seeks to meet Labour's pledge to boost defence spending, an economist has claimed.
The government has promised to increase defence spending to 2.5 per cent of GDP by 2027, and has an 'ambition' – but no firm commitment – to raise it to 3 per cent in the next parliament, after 2029.
But the UK's Nato allies are expected also to push for a fresh target of 3.5 per cent, with the alliance's chief Mark Rutte pushing for a 'dramatic increase', with discussions over a possible 5 per cent target – as called for by Donald Trump – also taking place.
And Sir Keir Starmer this week vowed to make Britain 'a battle-ready, armour-clad nation' as a long-awaited defence review called for major upgrades to the UK's military.
While the major proposals were based around Labour's current spending pledges for 2027 and the next parliament, the report warned that 'as we live in such turbulent times it may be necessary to go faster' on increasing the UK's defence capabilities.
Michael Saunders, a senior economic adviser at the Oxford Economics consultancy, suggested that the government could take steps towards this in the chancellor's next Budget.
'To establish a more credible path to defence spending 'considerably north of 3 per cent' next decade, the government may decide in the autumn Budget that it needs to add some extra spending within the five-year OBR forecast horizon,' said Mr Saunders.
'It's not hard to see pressures for extra fiscal tightening of £15bn to £30bn,' he told The Telegraph. Fiscal tightening involves either raising taxes or cutting government spending.
Earlier this week, Paul Johnson, the director of the Institute for Fiscal Studies (IFS), also warned the only way to pay for the increased defence budget would be through 'chunky tax rises' as the government grapples with other key areas of public spending.
He told Times Radio: 'You really do have to ask that question, what are the choices that you're going to make? Bluntly, it really does seem to me that the only choice that is available, is some really quite chunky tax increases to pay for it.'
According to the IFS, hitting the 3 per target by 2030 would require an extra £17bn pounds between now and then which is yet to be accounted for.
Sir Keir has previously said that increasing defence spending to 2.5 per cent would mean 'spending £13.4bn more on defence every year from 2027'.
The Office for Budget Responsibility has also estimated that reaching 3 per cent by the next parliament would cost an additional £17.3bn in 2029/30.
Speaking in parliament as the defence review was unveiled this week, Lib Dem defence spokesperson Helen Maguire said: 'It is staggering that we still don't have an answer to the vital question: 'Where is the money coming from?' The government has flip-flopped a number of times on 3 per cent.'
On Tuesday, defence secretary John Healey failed to rule out tax rises to make Britain 'war ready' and insisted he was '100 per cent confident' the 3 per cent target would be met — but struggled to say how it would be paid for.
It came as defence sources were reported to expect that Britain will be forced to sign up to a target to hike defence spending to 3.5 per cent by 2035 at a Nato summit later this month in a bid to appease the US president.