Chancellor John Healey may need to raise taxes for middle earners to fund significantly higher defence spending, according to the Resolution Foundation thinktank. In a new report titled 'Thin End of the Wedge', economists suggest that raising the estimated £28bn a year needed to meet Labour's pledge of devoting 3.5% of GDP to defence by 2035 would require average workers to contribute more.
The Resolution Foundation states that despite £70bn a year in tax rises since Labour came to power in 2024, the UK's 'tax wedge'—taxes on earnings minus benefits—remains low by international standards. James Smith, the foundation's chief economist, noted that the UK still taxes average earners less than most international peers.
The analysis indicates that the tax wedge for a single earner on average pay is 32.4%, which is below the average for the OECD and G7 major economies. Smith also commented that no other rich OECD country has both a larger state and a lower burden on average workers, suggesting that politicians promising both are not being realistic.
Healey, who resigned from Keir Starmer’s government in June over defence funding, has indicated he will wait until next year’s spending review before presenting a plan. He is expected to present his first budget on 28 October and needs to find approximately £1.4bn a year over the next three years for Starmer’s defence investment plan.