Fund defence spending from tax rise on middle earners, thinktank tells Healey

Resolution Foundation argues that UK’s internationally low ‘tax wedge’ must rise to pay for defence ambitions

The chancellor, John Healey , must be prepared to raise taxes for middle earners if he wants to fund significantly higher defence spending, the Resolution Foundation thinktank has said.

Healey resigned from Keir Starmer’s government in June , protesting against what he argued was the then prime minister’s failure to adequately fund defence.

But in his new post in No 11 Downing Street, Healey has made clear that he will wait until next year’s spending review before presenting a plan to meet Labour’s pledge of devoting 3.5% of GDP to defence by 2035.

In a new report, entitled Thin End of the Wedge, economists at the Resolution Foundation suggest he will not be able to raise the £28bn a year it would take to meet that promise without asking average workers to pay more.

They say that despite historically large tax rises since Labour came to power in 2024, amounting to £70bn a year, the “tax wedge” – taxes on earnings, minus benefits – remains low by international standards.

“Despite recent increases, the UK still taxes average earners less than most of our international peers,” says the foundation’s chief economist, James Smith.

The analysis shows that tax rises under Healey’s predecessor, Rachel Reeves, resulted in a 2.4 percentage point jump in the tax wedge last year – the largest for any country in the Organisation for Economic Cooperation and Development (OECD).

Yet at 32.4% for a single earner on average pay, it remains below the average for the OECD and the G7 major economies, they say.

When the economists looked at countries with higher public spending, they found these tended to ask their average workers to contribute more – instead of relying on business or wealth taxes, for example.

“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,” Smith said.

“There is a strong case that any benefits of increased defence spending will be broadly shared, so the tax rises needed to find this should be too, including higher rates on middle earners.”

The tax wedge on a worker paid the median salary, of £33,000 as at April last year, is also low by historic standards, they argue – and is still below the level before the global financial crisis in 2008.

In Reeves’s two tax-raising budgets before she was sacked by Andy Burnham, the biggest revenue-raisers were employer national insurance contributions and fiscal drag – where income tax thresholds were left unchanged, so that more people end up paying higher rates.

She was constrained by Labour’s pre-election promise not to increase the rates of income tax, VAT or employee national insurance – which Burnham has promised to stick to .

As well as the longer-term defence pledge, Burnham’s government faces pressure to do more to cushion households against rising energy bills over the coming winter, and to beef up efforts to help unemployed young people into work .

Healey will present his first budget on 28 October and needs to find approximately £1.4bn a year over the next three years to pay for Starmer’s defence investment plan – which Healey in his last job derided as inadequate.