Rachel Reeves has signalled that taxes may have to rise again to fund Britain’s rearmament, as the government’s long-delayed defence funding blueprint slipped further down the timetable and pressure mounted from the opposition to find the money through welfare savings instead.
The Chancellor, who has already been warned she may need to find as much as £50bn through tax rises or spending cuts to stabilise the public finances, told a City audience that her Budget headroom would not stretch to cover the additional defence commitment, expected to be worth around £15bn, bargained down by the Treasury from an initial £18bn.
“The first duty of government is to keep its people safe,” she said. “In the world in which we live today it’s increasingly clear that us and other European countries are going to have to spend more on defence but crucially spend that money better. But the money has to come from somewhere and borrowing cannot always be the answer.”
Defending her record, Reeves argued that “despite the pain of higher taxes” it was better to hold the line on the public finances than risk climbing interest rates and a rising UK risk premium. Her fiscal statements have raised an extra £75bn a year in under two years, comfortably ahead of Gordon Brown’s £62.1bn and enough to make her the biggest tax-raising Chancellor in six decades. The Office for Budget Responsibility forecasts the tax burden will hit 38.5 per cent of GDP by 2030-31, the highest since records began, and has warned that the freeze on earnings thresholds leaves revenues acutely sensitive to shifts in inflation and pay growth.
At a bad-tempered Prime Minister’s Questions, Sir Keir Starmer appeared to pour cold water on hopes that the Defence Investment Plan (DIP), the funding document intended to turn last year’s Strategic Defence Review into costed programmes, would be published this week, committing only to releasing it before the NATO summit on 7 July.
Pressed by Conservative leader Kemi Badenoch on whether the full plan would “finally” appear this week, the Prime Minister pointed to the increase in defence spending from 2.3 per cent to 2.6 per cent of GDP by 2027, worth £270bn over the Parliament. “That sounded like a ‘no’,” Badenoch shot back.
The slippage matters for business. Departments are understood to have been asked to surrender an average of 1 per cent of their capital budgets to raise £6bn towards the plan, a raid that could hit school and hospital programmes and delay transport infrastructure. Yet for the defence supply chain the prize is considerable: analysis suggests higher military spending could deliver a £30bn annual boost to the UK economy, with around two thirds of MoD private-sector spending flowing to UK-based suppliers.
The government’s room for manoeuvre remains constrained after last year’s backbench revolt killed off efforts to curb sickness benefits, leaving ministers squeezed between a welfare bill heading towards £333bn and a tax burden already at a post-war peak. Work and Pensions Secretary Pat McFadden is reported to have privately complained that Labour MPs only cared about who they could “tax in order to pay benefits to others”.
Touring broadcast studios, Labour Party chair Anna Turley declined to deny that taxes would have to rise again, saying only that there were “very difficult decisions to be made across the board in every department” and that the Chancellor was “having those conversations right now”.
For SME owners, the signals are hard to misread. With the OBR warning the Exchequer is increasingly reliant on a narrow base of better-off taxpayers, and a leadership “bidding war” seeing rivals float wealth taxes, land value taxes and council tax revaluation, the question facing business is less whether the burden rises again, but where it lands.
