Keir Starmer’s defence pledge will prompt ‘tough choices’ on tax
Keir Starmer’s commitment to increase the defence budget to three per cent of GDP in the next parliament will require difficult choices on tax and spending, analysts have warned.
The Prime Minister confirmed yesterday that defence spending will rise to 2.5 per cent of GDP by 2027, up from 2.3 per cent at the moment.
The increase will be funded by further cuts to the foreign aid budget, but Starmer also set out a “clear ambition” for defence spending to rise to three per cent of GDP by 2034.
Ben Zaranko, associate director at the Institute for Fiscal Studies (IFS), said “cuts to aid won’t be enough” if Starmer wants to push defence spending towards three per cent.
“Getting towards three per cent of GDP will eventually mean more tough choices and sacrifices elsewhere – whether higher taxes, or cuts to other bits of government,” he said.
Ruth Gregory, deputy chief UK economist at Capital Economics, said that the government was already “within a whisker” of breaking its fiscal rules, which limited its room for manoeuvre.
Unless the Chancellor tweaked the rules, Gregory said the government would need to either raise taxes or cut spending by 0.5 per cent of GDP, equal to around £20bn.
An alternative option reportedly under consideration is a European rearmament bank, which would borrow against capital provided by participating governments.
This would enable a significant increase in defence spending without putting the burden on national balance sheets.
At a meeting of G20 finance ministers in South Africa, the Treasury confirmed that Chancellor Reeves will discuss how private finance can be mobilised to increase defence spending.
“National security will always be the first responsibility of this government and is the bedrock economic growth,” she will say.
But analysts agreed that the government would struggle to increase defence spending on a sustained basis through higher borrowing.
Gregory pointed out that defence spending would not improve the productive capacity of the economy, unlike infrastructure investment, and so markets would likely be wary about lending.
“Any increase in borrowing to fund higher defence spending could add to concerns about debt sustainability, leading to a rise in gilt yields,” she said.
Zaranko agreed. “If the UK needs to spend more on defence on a structural and permanent basis, that is not something that can be sustainably borrowed for,” he said.
Simon French, head of research at Panmure Liberum, suggested that the three per cent pledge could be a “carrot to dangle in Washington, rather than a costed commitment”.