Thinktank tells Healey defence spending boost must come from tax rise on middle earners

The Resolution Foundation thinktank has warned Chancellor John Healey that he will be unable to raise the funds needed for a significant boost in defence spending without asking middle-income workers to pay more tax.

Healey resigned from Keir Starmer's government in June, arguing that defence had been inadequately funded. Now in his role at No 11 Downing Street, he has said he will wait until next year's spending review before setting out a plan to meet Labour's pledge of spending 3.5% of GDP on defence by 2035.

A £28bn gap

In a report titled Thin End of the Wedge, the foundation's economists estimate that meeting the pledge would require around £28bn a year, a sum they say cannot be raised without new taxes. Despite historically large tax increases worth £70bn a year since Labour took 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, said the UK still taxes average earners less than most peer nations. Under former chancellor Rachel Reeves, the tax wedge rose by 2.4 percentage points last year, the largest increase among OECD countries, yet it remains below the OECD and G7 average, at 32.4% for a single average earner.

The analysis found that countries with bigger public spending tend to ask more of average workers rather than relying mainly on business or wealth taxes. Smith argued that no other wealthy OECD country combines a large state with a low tax burden on average workers, making such promises unrealistic. He added that since the benefits of higher defence spending would be broadly shared, the tax increases to pay for it should be too, including higher rates for middle earners.

What comes next

In Reeves's two tax-raising budgets, the largest revenue sources were employer national insurance contributions and frozen income tax thresholds, which pulled more people into higher tax bands. She was bound by Labour's pre-election pledge not to raise income tax, VAT or employee national insurance rates — a commitment current prime minister Andy Burnham has said he will maintain.

Beyond the defence pledge, the government also faces pressure to help households with rising winter energy bills and to do more for unemployed young people. Healey will deliver his first budget on 28 October and needs to find about £1.4bn a year over the next three years for the defence investment plan he previously criticised as insufficient.