Rachel Reeves could be forced to impose more massive tax increases as pressure grows on the Chancellor to increase defence spending.
Experts warned meeting US President Donald Trump’s demands would cost the UK £80 billion, twice the sum raised in last year’s Budget which included hikes to National Insurance and inheritance tax on family farms. Prime Minister Sir Keir Starmer is due to meet Mr Trump to discuss the future of Ukraine and the US commitment to NATO next week.
Even a smaller increase in defence spending “would require spending cuts elsewhere, tax rises, or some combination of the two”, according to the Institute of Fiscal Studies.
Sir Keir has pledged to increase defence spending to 2.5% of GDP, up from £60 billion or 2.3% now. However the US President is urging NATO allies such as the UK to hit a target of 5%.
And there is growing pressure at home for a bigger rise than planned and military chiefs are understood to have told the Prime Minister the UK needs to spend at least 3%, when they met Sir Keir to discuss the strategic defence review to be published before the summer.
Former Chancellor Jeremy Hunt called for the UK to match the US, which sends 3.2% of GDP on defence. He said: “We need to say that we are prepared to contribute fairly to the defence of Europe, because as we know Donald Trump is fixated on China, he thinks Europe should be defending itself.”
But Ben Zaranko, an Associate Director at the Institute for Fiscal Studies, said: “Going to 3% of GDP would mean spending £20 billion more on defence. Going all the way to 5% of GDP would mean spending around £80 billion more. For context, Rachel Reeves’ historically large tax rises in the Autumn Budget amounted to around £40 billion. These are enormous sums.
“If there a structural need to permanently spend more on defence, that is not the sort of thing that can sustainably be met through higher borrowing.”
And he said: “If defence spending does need to rise significantly, it’s difficult to overstate the seriousness of the fiscal challenge this would pose to the government.”
