The Resolution Foundation warns that Chancellor John Healey may need to increase taxes on middle earners to meet the ambitious goal of raising defence spending to 3.5% of GDP.

  • Meeting defence goals requires an additional £28bn annually.
  • The UK's 'tax wedge' remains low compared to OECD and G7 peers.
  • Direct taxation on middle earners may be unavoidable to fund military ambitions.

Chancellor John Healey faces a daunting fiscal dilemma. According to a new report by the Resolution Foundation, if the UK government intends to fulfill its pledge of devoting 3.5% of GDP to defence by 2035, it must be prepared to raise taxes on middle earners.

The report, titled 'Thin End of the Wedge', argues that the sheer scale of required spending—approximately £28 billion per year—cannot be met solely through wealth or business taxes. Instead, the burden will likely fall on the average worker to bridge the massive funding gap.

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Why This Matters

BozokMedia analysis shows that this tension between national security and domestic economic pressure is reaching a breaking point. While the government aims to bolster military capabilities in an increasingly volatile global landscape, the fiscal reality of the UK's low 'tax wedge' makes high public spending difficult to sustain without broader tax contributions.

"No other OECD rich country has a bigger state and a lower burden on average workers, so any politician promising both is not being realistic," says James Smith, Chief Economist at the Resolution Foundation.

Historically, the UK's tax wedge—the difference between what employees receive and what they cost their employers—has been lower than many international peers. Even after recent tax increases under former Chancellor Rachel Reeves, the rate stands at 32.4% for a single earner on average pay, which remains below the OECD and G7 averages.

The political challenge is compounded by Labour's pre-election promises not to raise income tax, VAT, or employee national insurance. However, as Healey prepares to present his first budget on 28 October, the pressure to find £1.4 billion annually for the immediate defence investment plan is mounting.

Did You Know?: The UK's tax wedge is currently lower than it was even before the 2008 global financial crisis.

Frequently Asked Questions

1. What is the 'tax wedge'?
It is the difference between the gross cost to an employer and the net income received by an employee after taxes and benefits.

2. How much more does the UK need for defence?
The government needs to find roughly £28 billion a year to meet its long-term defence spending targets.