Labour’s commitment to raising defence spending to 2.5 per cent of GDP by 2027—and ambitiously to 3 per cent in the next parliament—could force Chancellor Rachel Reeves to secure up to £30bn in extra funding through tax increases or spending cuts. With NATO allies urging even higher targets, some suggesting 3.5 per cent or even 5 per cent, the pressure is mounting on the UK government to align its fiscal strategy with international expectations.
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A senior economic adviser at Oxford Economics, Michael Saunders, has warned that extra fiscal tightening of between £15bn and £30bn is likely to be necessary in the next Budget. According to Saunders, building a credible pathway for defence spending “considerably north of 3 per cent” over the next decade may require additional measures within the five-year horizon forecast by the Office for Budget Responsibility. This, he argues, could mean implementing significant tax rises or making further cuts to other public spending areas.
The Institute for Fiscal Studies has similarly cautioned that achieving a 3 per cent target by 2030 would require an extra £17bn, highlighting that the issue of “where the money is coming from” remains unresolved. With Prime Minister Keir Starmer asserting that increasing the defence budget to 2.5 per cent would entail spending an additional £13.4bn each year from 2027, the financial challenge is clear. Defence Secretary John Healey, despite his confidence that the 3 per cent target will be met, has struggled to specify how the necessary funding will be sourced.
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The debate comes at a time of intense scrutiny over government spending and fiscal policy, as well as mounting demands from NATO for increased defence investment. Opposition voices, including Lib Dem defence spokesperson Helen Maguire, have expressed astonishment at the lack of a clear funding strategy. As discussions at an upcoming NATO summit hint at a potential target of 3.5 per cent by 2035, the fiscal crossroads confronting the UK government may well force Chancellor Reeves to make some tough choices ahead.
