Fund defence spending from tax rise on middle earners, thinktank tells Healey
Developed over time first seen 2 months ago
The Resolution Foundation thinktank has warned Chancellor John Healey that he cannot meet Labour's pledge on defence spending without raising taxes on middle earners, arguing the UK's "tax wedge" remains internationally low despite recent rises. This matters because Healey, who resigned from government in June over what he called inadequate defence funding, now holds responsibility for financing that ambition from No 11, with his first budget due on 28 October and additional pressure to help households with energy bills and tackle youth unemployment.
The thinktank's report, Thin End of the Wedge, found that despite tax rises since 2024 totalling £70bn a year — including the largest single-year jump in the tax wedge of any OECD country last year, at 2.4 percentage points — the UK's rate of 32.4% for an average single earner remains below the OECD and G7 averages. Meeting the pledge to spend 3.5% of GDP on defence by 2035 would require finding an extra £28bn a year, with Healey needing roughly £1.4bn annually over the next three years just to fund Keir Starmer's existing defence investment plan; the report's authors, including chief economist James Smith, argue that no OECD country combines a larger state with a lower tax burden on average workers, and that any tax rises to fund defence should be broadly shared, including through higher rates on middle earners.
- Sources
- 2
- Outlets
- 2
- Left · Centre · Right
- 2 · 0 · 0
In short
- Resolution Foundation says Healey must raise middle earners' taxes for defence goals
- UK's "tax wedge" still below OECD and G7 averages despite £70bn in rises
- Healey's first budget as chancellor falls on 28 October
How this story developed
- 2 months ago The Resolution Foundation thinktank has told Chancellor John Healey he cannot meet Labour's defence spending pledge without raising taxes on middle earners, given the UK's internationally low "tax wedge".
- 2 months ago The Resolution Foundation thinktank has warned Chancellor John Healey that funding Labour's defence spending pledge will require higher taxes on middle earners, as the UK's "tax wedge" remains internationally low despite recent rises.
- 2 months ago The Resolution Foundation thinktank has warned Chancellor John Healey that he cannot meet Labour's pledge on defence spending without raising taxes on middle earners, arguing the UK's "tax wedge" remains internationally low despite recent rises.
Full account
A leading economic thinktank has told the Chancellor, John Healey, that he will need to raise taxes on middle earners if the government is to meet its ambition of significantly increasing defence spending. In a new report, the Resolution Foundation argues that Britain's 'tax wedge' — the gap between what an employee costs and what they take home, once benefits are netted off — remains low by international standards, even after a series of large tax increases since Labour took office in 2024. The foundation calculates that meeting Labour's pledge to spend 3.5% of GDP on defence by 2035 would require finding around £28bn a year, a sum it believes cannot realistically be raised without asking average-income workers to contribute more.
The report lands as Healey settles into the Treasury having resigned from government in June in protest at what he called insufficient funding for defence under the previous administration led by Keir Starmer. He has since indicated he intends to hold off setting out a detailed funding plan until next year's spending review, rather than move immediately. The Resolution Foundation's analysis, titled Thin End of the Wedge, contends that this delay does not remove the underlying arithmetic problem: however the money is eventually found, a large share is likely to fall on middle earners rather than being met solely through business or wealth taxation.
According to the foundation, tax rises introduced by Healey's predecessor as Chancellor, Rachel Reeves — mainly through higher employer national insurance contributions and the freezing of income tax thresholds, which pulls more earners into higher tax bands — pushed the UK's tax wedge up by 2.4 percentage points last year, the sharpest single-year rise recorded among OECD countries. Even so, the thinktank says the wedge for a single worker on average pay stands at 32.4%, still below both the OECD and G7 averages, and that the burden on someone earning the median salary of £33,000 remains lower than it was before the 2008 financial crisis. The foundation's chief economist, James Smith, argued that no other wealthy OECD economy combines a larger state with a lighter tax burden on typical workers, and that if defence spending benefits are shared broadly across society, the tax rises to pay for it should be too — including higher rates for middle earners.
The report also feeds into a wider debate about the government's fiscal choices. Reeves's tax-raising budgets were constrained by a pre-election commitment not to raise the headline rates of income tax, VAT or employee national insurance — a pledge her successor as head of government, Andy Burnham, has said he will maintain, adding to the pressure to find revenue elsewhere. Separately, the former NatWest chairman Sir Howard Davies has warned that the state pension triple lock is unaffordable given the cost of government borrowing, cautioning that failing to address it could damage the administration's credibility and was already unsettling financial markets. The timing is pointed: Burnham faced his first Prime Minister's Questions against the Conservative leader, Kemi Badenoch, with tax policy and defence funding expected to feature prominently in that exchange.
Where outlets differ
From the full account, which is AI-written from the sources:
The Guardian-style source treats the Resolution Foundation report as the central story, giving detailed figures (the £28bn defence funding gap, the 2.4 percentage point tax wedge rise, the 32.4% figure, the £33,000 median salary) and direct quotes from chief economist James Smith.
The Independent's coverage embeds the thinktank warning within a broader daily political round-up, giving comparatively little detail on the report itself but adding related context not found in the other source — notably Sir Howard Davies's warning that the pension triple lock is unaffordable, and the framing of the story around Andy Burnham's first PMQs against Kemi Badenoch.
The Independent source also contains unrelated political items (the Holborn and St Pancras by-election, Zack Polanski's Green Party comments, and Nigel Farage filming on the Houses of Parliament roof) that are not connected to the defence-tax story and have been excluded from this account.
Only the first source names the report's title (Thin End of the Wedge) and explains the mechanics of the tax wedge and how Reeves's previous budgets raised revenue.
Steelman: both sides, in good faith
The strongest fair case each way — we don't pick a winner.
The case for
Advocates of raising taxes on middle earners for defence argue that Britain's tax wedge is genuinely low by international standards, so meeting a serious rearmament pledge without it means either breaking the promise or raiding capital and business taxes in ways that could depress investment and growth. They contend that national security is a collective good that everyone benefits from, and that international precedent shows states with larger defence commitments typically ask broad-based taxpayers to contribute rather than relying narrowly on the wealthy or businesses, whose taxes are already historically stretched and more mobile. On this view, being honest with voters about the true cost of the defence pledge, rather than pretending it can be funded painlessly, is both fiscally responsible and more sustainable in the long run.
The case against
Opponents argue that squeezing middle earners again would break a clear, recent manifesto commitment not to raise income tax, VAT or employee national insurance, undermining trust in a government that has already presided over record tax rises including the largest single-year jump in the tax wedge of any OECD country. They point out that middle earners are simultaneously being asked to help with the cost of living and energy bills, and worry that further squeezing disposable incomes could dampen consumer spending and deepen the sense that ordinary workers are shouldering burdens that wealthier individuals, landowners or large corporations could bear instead. For them, protecting living standards and keeping explicit promises to taxpayers should take precedence over any single spending pledge, however important defence may be.
Explained simply
Defence spending has become a live political fight over money. Labour has promised to raise UK defence spending to 3.5% of national income by 2035, but that pledge costs a lot more than the government currently budgets for, so ministers need to find extra funds from somewhere, whether through taxes, borrowing or cuts elsewhere.
John Healey is the Chancellor, based at No 11 Downing Street, who is now responsible for working out how to pay for this commitment. He previously resigned from government in June, saying defence funding at the time was not adequate, which adds weight to the question of how he will fund the pledge now that the job has fallen to him. His first budget as Chancellor is due on 28 October, and he also faces calls to address rising energy bills and youth unemployment.
The Resolution Foundation is an independent thinktank that studies living standards and economic policy. In a new report, it argues that the UK's tax take from an average worker's pay is relatively low compared with other wealthy countries, and that funding a defence spending increase of this scale would likely mean asking middle-income earners to pay more tax, rather than relying solely on businesses or the wealthy. This sits alongside a promise from Prime Minister Andy Burnham not to raise income tax, VAT or employee national insurance rates, creating a tension between the spending pledge and existing tax commitments.
Coverage · 2 sources
Bias meters
From 2 rated sources.
Business Celebrity Entertainment Government Politics