Income tax will need to rise to fund defence push, Mervyn King says
The government will likely need to increase income tax in order to fund higher defence spending and “oil the wheels” of public service reform, the former Governor of the Bank of England said.
Speaking on Sophy Ridge’s show on Sky News, Mervyn King acknowledged the government was in a “very difficult position,” but criticised it for a lack of ambition.
“When you’re facing a very difficult position, it pays to be bold and ambitious. And I don’t think the government is being either in their approach so far,” he said.
Lord King’s comments come around a month before the spring statement, in which the Chancellor is likely to have to cut spending or increase taxes in order to stay on the right side of her fiscal rule.
But rather than having the level of public spending be determined by the Office for Budget Responsibility’s (OBR) forecasts, King urged the Chancellor to lay out a “narrative”.
“She shouldn’t just cut or change spending in response to the latest OBR forecasts,” he said.
“What she’s got to do, I think, is come up with a genuine narrative for the path of government spending right through this parliament, and explain why this is the amount we have to spend.”
This would include making clear commitments about the required levels of spending on areas of policy like health, defence and social care, where there is currently significant uncertainty.
But King also said that this would require higher taxes. “Its very hard to imagine that we can really increase credibly our defence spending to where it needs to be, and carry out reforms – which may need some money to oil the wheels of reform – without raising taxes,” he said.
“The obvious tax to raise is the basic rate of income tax, we will all contribute to it.”
“I see no harm in doing that,” King added.
The comments come as the government set out a “clear ambition” to lift defence spending to three per cent of GDP by the end of the next parliament.
Analysts at Capital Economics suggested that Reeves would have to raise taxes or cut spending by around £20bn to finance greater defence spending.