Keir Starmer’s announcement earlier this week that the UK government would increase defence spending to 2.5% of GDP by 2027 – with a long-term goal of raising it to 3% of GDP by the next Parliament – took many by surprise. Not because of the commitment itself, which had been anticipated, but because of the speed at which the 2.5% target will be reached and how the government intends to fund it.
The move, funded by a reduction in the foreign aid budget from 0.5% to 0.3% of GDP, appears to be a calculated effort to strengthen Starmer’s position ahead of his trip to Washington on 27th February. While there, he will attempt to persuade Donald Trump to maintain military support for Ukraine and provide security guarantees in any negotiated peace.
This follows a fundamental shift in global security dynamics. Trump’s decision to exclude Ukraine from peace talks and pursue direct negotiations with Russia has upended European security policy. It has forced European leaders to confront an uncomfortable reality: the US may no longer be a reliable partner.
Like many of his European counterparts, Starmer is responding to this new reality by ramping up defence spending. However, relying on cuts to overseas aid to fund this increase in the short term only delays the inevitable. If the government is serious about delivering on its commitments – especially its long-term goal of spending 3% of GDP on defence – it will have to raise taxes.
Despite what the Government will want, Tax Increases Look like the Only Long-Term Option
Increasing defence spending to 2.5% of GDP will result in a real-terms increase in the annual defence budget of approximately £6 billion per year by 2027. For now, the government has avoided the political headache of tax hikes by using foreign aid cuts to cover this cost. However, reaching the 3% target by the next Parliament – which many defence experts argue is necessary to meet current security challenges – would require significantly more funding, likely amounting to an additional £13 – £15 billion per year on top of the £6 billion already committed.
So, how will the government pay for it?
Across Europe, many governments are considering loosening fiscal rules to enable more borrowing, with the European Commission signalling a willingness to adjust its guidelines to accommodate higher defence spending.
But in the UK, such a shift is unlikely.
The Chancellor introduced the current fiscal rules in October and has since doubled down on their importance, calling them “paramount.” There is also cross-party consensus in Westminster that the rules are necessary. Reversing course now would not only be an embarrassing U-turn but could unsettle financial markets still cautious in the aftermath of the October budget.
Instead, the government could choose to implement further spending cuts, but they come with significant risks. Whitehall is already preparing for deep cost-saving measures ahead of the Spring Statement, with unprotected departments asked to model cuts between 2% and 11% over the next three years. Attempting to carve out additional savings from already-stretched budgets could severely undermine the government’s wider policy commitments – particularly in areas like healthcare, education, and policing, where the public expects investment, not retrenchment.
That leaves taxation as the only viable path forward.
The government, for now at least, has remained committed to its manifesto pledge that it will not increase taxes for working people. However, the current geopolitical situation could provide the political cover necessary for the government to roll back on this promise.
Some reports suggest the government is already considering extending the freeze on income tax thresholds and allowances beyond 2028, a measure previously avoided in October. However, the Institute for Fiscal Studies estimates that such a move would generate only £3.5–£4 billion per year – far short of the £13-£15 billion needed to meet the 3% target. If the government is serious about funding long-term increases in defence spending, it will need to go further.
The most straightforward and sustainable option is to raise income tax on higher earners or adjust National Insurance Contributions (NICs). Increasing the top rate of income tax would not only provide the necessary revenue but would also distribute the burden in a way that is progressive and avoids harming the lowest earners.
Regardless of which path the government chooses, it must act quickly. The commitment to spend 2.5% of GDP on defence by 2027 is a welcome first step, but the geopolitical reality is shifting by the day, and clinging to the status quo is no longer an option.
One small solace for Starmer is that he may have more room for manoeuvre than he realises. Political promises, even ones on taxation, are often tested by events, and in times of crisis, electorates can be surprisingly forgiving. If the government frames tax increases as essential for national security, it may find the political fallout less severe than expected.
Ultimately, the world is changing, and the government must change with it. Increasing taxes will be politically difficult, particularly in the short term, but the alternative would be far costlier in the long run.
