Rachel Reeves is overseeing what the International Monetary Fund has identified as the fastest pace of tax increases in the world, with Britain’s overall tax burden set to reach a record peacetime high.
According to IMF projections, taxes will rise to 42.1 per cent of GDP by the early 2030s, following a series of measures imposed on households and businesses since Labour took office. The increase amounts to around £130bn in additional taxation, equivalent to roughly £4,500 per household.
The scale and speed of the increases place the UK well ahead of comparable economies. Over the next five years, tax rises in Britain are expected to be nearly three times faster than in France, pushing the country closer to high-tax regimes such as Denmark, rather than more competitive economies like the United States.
Despite the sharp rise in taxes, the public finances remain under strain. A £28bn shortfall in defence funding has exposed what critics see as a growing gap between Labour’s spending ambitions and its ability to pay for them. Sir Keir Starmer is facing mounting pressure to explain how he intends to meet his target of spending 3 per cent of GDP on defence while also pursuing wider military investment plans.
The question of how to fund that increase has sparked tensions within Labour. Some figures have suggested cutting welfare spending, a move that risks deepening divisions within the party.
Defence Secretary John Healey acknowledged the scale of the challenge, saying the “demands on defence are rising” and that ministers would take “hard decisions when necessary” to rearm Britain.
He added: “I would say to our own politicians in Parliament, as they say to the British public, that we know the threats that we face in Britain – and that we face together as Nato allies – are rising.”
At the same time, the Chancellor has pointed to global instability to explain the UK’s economic difficulties. Speaking in Washington, DC, she said that “the best economic policy now, not just for the UK but globally, is de-escalation of the conflict” in Iran, describing the war as a “mistake”.
Her remarks went further than earlier criticism of the US president, when she accused him of “folly” for starting a war without an exit plan, prompting Donald Trump to threaten to tear up a trade deal with the UK.
Responding to the IMF’s findings, Ms Reeves said: “The war in Iran is not our war, but it will come at a cost to the UK. These are not costs I wanted, but they are costs we will have to respond to.”
However, critics argue that external factors do not explain the scale of domestic tax rises, which have come despite Labour’s manifesto pledge not to increase taxes on working people. In practice, many of the Chancellor’s measures have increased the burden on workers and businesses, largely to fund a growing welfare bill.
Calls to rein in benefit spending have intensified as pressure grows to boost defence funding. Lord Robertson, who led Labour’s strategic defence review, warned of what he described as “corrosive complacency” on military spending.
Others, including Baroness Harman and former Conservative chancellor Jeremy Hunt, have suggested scrapping the pensions triple lock to free up funds. The policy is expected to drive a 16 per cent real-terms increase in state pension spending over the next five years.
Sir Keir has so far refused to commit to spending cuts, despite an offer from Conservative leader Kemi Badenoch to support reductions in welfare if required, leaving questions over how Labour intends to balance its commitments.
The uncertainty is beginning to weigh on Labour politically. The challenge of raising defence spending to 2.6 per cent of GDP next year is threatening to overshadow the party’s local election campaign, with polling suggesting significant losses in England and the possible end of Labour control in Wales for the first time since devolution.
The Prime Minister said the long-delayed Defence Investment Plan would be published “as soon as possible”, but declined to provide a timetable, fuelling concern among MPs that the Government is unprepared for rising global threats.
According to the Telegraph, a senior government source indicated that the delay was deliberate, aimed at avoiding internal conflict before the local and devolved elections on May 7. “No one really wants to take the big fight on this until after the local elections, because there are many MPs on the Labour benches who do agree with Lord Robertson,” the source said.
The postponement has also raised doubts about the scale of any defence spending increase. Reports suggest the Treasury is considering a rise of around £10bn, lower than some had expected, although this has not been confirmed.
While Ministry of Defence officials are understood to have completed the investment plan, its publication remains contingent on ongoing negotiations with the Treasury, underlining the unresolved questions at the heart of Labour’s fiscal strategy.
