UK Faces Fresh Wave of Tax Rises to Fund Defence Spending

Strategic Insights -

Households in the UK may face an additional barrage of tax increases as the government grapples with meeting its renewed commitments on defence spending. Paul Johnson, the director of the Institute for Fiscal Studies, warned that a lot more tax rises will be necessary to meet the increased spending, particularly with the opposition Labour Party under pressure to water down its spending cuts. The threat of further levies comes as the government struggles to make up for the shortfall in its fiscal plans, which have been derailed by weak economic growth and high borrowing costs.

Key Takeaways:

  • The UK government is expected to commit to spending 5% of GDP on "national security" at the Nato summit in The Hague, up from the current 2.4%.
  • This increased spending could be paid for with a 3p rise in the basic and higher rates of income tax, taking them to 23% and 43% respectively.
  • An extra £30bn of spending could also be raised by increasing VAT from 20% to 23%, or raising corporation tax from 25% to 32.5%, according to HMRC estimates.
  • Labour's promise not to raise any headline taxes in its election manifesto last year may be at risk of being broken if the party goes ahead with the tax rises.
  • The Institute for Fiscal Studies has warned that further tax increases are likely, given the government's growing fiscal pressures and weak economic growth.

Statistics:

  • £30bn: the estimated amount of extra spending on defence that the UK government may need to fund.
  • 5%: the proportion of GDP that the government is expected to commit to spending on "national security".
  • 2.4%: the current proportion of GDP spent on national security.
  • 3p: the estimated increase in the basic and higher rates of income tax required to finance the increased spending.
  • 23% and 43%: the potential new rates for the basic and higher rates of income tax, respectively.
  • 20% and 23%: the potential new rates for VAT, respectively.
  • 25% and 32.5%: the potential new rates for corporation tax, respectively.

Sources:

  • "A lot more" tax increases will be needed to meet renewed commitments on defence, particularly as Sir Keir Starmer comes under pressure to water down spending cuts. (Paul Johnson, Director, Institute for Fiscal Studies)
  • "If spending goes only one way, then so, inevitably, will tax. Historic increases already this decade. Looks like a lot more to come." (Paul Johnson, Director, Institute for Fiscal Studies)
  • £30bn on defence. U-turn on winter fuel. Rebellion on plans which just slightly slow huge increases in spending on disability benefits. (Paul Johnson, Director, Institute for Fiscal Studies)
  • The threat of further levies comes after Rachel Reeves's £40bn tax-raising Budget last October. (The Guardian)
  • The autumn Budget was intended to cover the Government's spending plans for much of the rest of this parliament. (The Guardian)
  • The Prime Minister is also under mounting pressure to limit welfare savings. (The Guardian)