Higher tax ‘inevitable’ as PM makes defence spending pledge
Keir Starmer’s fresh commitment to ramp up defence spending to five per cent as a share of GDP by 2035 will almost certainly have to be funded by more tax hikes, the Institute for Fiscal Studies (IFS)’ Paul Johnson has warned.
The government’s pledge to spend 3.5 per cent of GDP on defence and a further 1.5 per cent in related areas such as infrastructure comes ahead of a Nato summit in the Hague where 32 member countries are expected to agree to the new target.
But Johnson, director at the IFS and former spending chief at the Treasury, said the latest commitment would lead to further tax hikes in the coming year, even as the tax burden is set to reach its highest level since 1948 after Chancellor Reeves raised £40bn at last year’s Autumn Budget.
“If spending goes only one way then so, inevitably, will tax,” Johnson wrote on X, highlighting additional commitments on welfare.
The Labour government has so far set out plans to increase defence spending to 2.7 per cent by 2027, with a further 1.4 per cent to be accounted for when spending on defence infrastructure and other elements such as cyber security or the border force are included.
Smoke and mirrors
The new commitment could see the UK spending £40bn more on defence a year.
Shadow defence secretary James Cartlidge has accused the government of “using smoke and mirrors to inflate defence spending” and called for a fully funded plan to be made immediately.
But cuts to expenditure on welfare are in jeopardy as some 108 Labour backbenchers have called for a pause to changes on disability benefits that could save the Treasury £4.8bn a year by 2030.
An amendment that calls for welfare changes to be delayed until after a consultation is being led by Treasury Committee chair Meg Hillier, with several other backbenchers worried that cuts could send more Brits into poverty.
The bill could be struck down if all 108 MPs and opposition parties vote against the government.
Government warned on tax hikes
Any U-turn on planned welfare cuts would follow a partial reversal on cuts to winter fuel payments. Three quarters of pensioners are set to be given up to £300 later this year, meaning the government will save just £250m rather than the £1.5bn it originally hoped for.
Reeves is also under pressure to keep her fiscal headroom worth £9.9bn intact, with predictions that higher gilt yields brought by market jitters and stalled interest rate cuts will leave the Chancellor needing to claw back as much as £20bn in tax hikes.
Labour ministers are reportedly drawing up plans on where to raise taxes after a manifesto commitment ruled out hikes to income tax, VAT and employee national insurance contributions.
City leaders have warned the government not to target dividend taxes or bank profits as it would risk undermining Reeves’ mission to deliver higher growth.