Rachel Reeves, the Chancellor of the Exchequer, might have to introduce more big tax increases as there’s growing pressure to spend more on defense. Experts say meeting US President Donald Trump’s demands could cost the UK £80 billion, which is double the amount raised in last year’s Budget through tax hikes like National Insurance and inheritance tax on family farms. Prime Minister Keir Starmer is set to meet Trump soon to talk about Ukraine and the US role in NATO.
Even a smaller increase in defense spending would mean cutting spending in other areas, raising taxes, or both, according to the Institute for Fiscal Studies. Starmer has promised to raise defense spending to 2.5% of GDP, up from the current 2.3%. But Trump wants NATO allies, including the UK, to aim for 5%.
There’s also pressure at home to spend more on defense. Military leaders have reportedly told Starmer that the UK needs to spend at least 3% of GDP on defense. This came up during talks about a defense review that will be published before summer.
Former Chancellor Jeremy Hunt said the UK should match the US, which spends 3.2% of GDP on defense. He argued that the UK needs to contribute fairly to Europe’s defense, especially since Trump is focused on China and thinks Europe should handle its own defense.
However, Ben Zaranko from the Institute for Fiscal Studies warned that increasing defense spending to 3% of GDP would cost an extra £20 billion, and reaching 5% would cost around £80 billion. For comparison, Rachel Reeves’ recent tax increases raised about £40 billion. He said such large sums can’t be covered by borrowing and would require tough decisions on taxes or spending cuts.
If defense spending needs to rise significantly, it would create a major challenge for the government’s finances.
