Labour’s ‘war-ready’ plans will be blown apart by Nato’s demand for 3.5% spending on defence and cause £40billion funding shortfall… and tax hikes might be the only way to plug the gap
Voters were warned last night to brace for further tax rises after Nato spending demands blew a £40billion hole in Labour’s plans.
Nato chief Mark Rutte has told Keir Starmer and other leaders that the alliance later this month will raise its minimum spending target from 2 per cent of GDP to 3.5 per cent by 2035 to deter Russia’s Vladimir Putin and placate US President Donald Trump.
Military sources said it would be ‘unthinkable’ for Britain to refuse the demand given its leading role in Nato.
But experts claimed the bill could eventually run to £40billion a year – the same amount raised by Chancellor Rachel Reeves in her controversial Budget last year and equal to 5p on the basic rate of income tax.
Defence Secretary John Healey refused to rule out tax increases to help fund the push to move Britain to a position of ‘war-fighting readiness’ but said ministers would ‘set out how we’ll pay for future increases in the future’.
The Prime Minister has committed to raising defence spending from 2.3 per cent of GDP to 2.5 per cent by 2027. And he has said the Government will move to 3 per cent at some point in the early 2030s ‘subject to economic and fiscal conditions’.
But he repeatedly refused to set an ‘arbitrary date’ for meeting it or set out how it would be funded.
Sir Keir was holding emergency talks with advisers in Downing Street about how to respond to the demand. He said this week there were ‘discussions about what the contribution should be going into the Nato conference’.
Chancellor of the Exchequer Rachel Reeves and Defence Secretary John Healey (centre right) walk with soldiers and staff at the Stanford Training Area on October 20, 2024 near Thetford, England
Secretary General Mark Rutte attends a press conference before a meeting of the leaders of the Bucharest Nine and the Nordic countries in Vilnius, Lithuania, 2 June 2025
Soldiers demonstrate the EXO Insight glasses which are an eye tracking virtual behaviour monitoring system on October 14, 2021 in Salisbury, England
This week’s Strategic Defence Review said Britain must be ready ‘to step up, to lead in Nato and take greater responsibility for our collective self-defence’.
Whitehall sources cautioned the Nato target may not have to be met in full for a decade, although intermediate goals could be set along the way.
The increased spending demand comes at a time when Ms Reeves is already struggling to meet her own fiscal rules and ministers are in retreat over welfare cuts.
The Institute for Fiscal Studies warned ‘chunky’ tax rises would be needed even to hit 3 per cent spending on defence.
Professor Malcolm Chalmers, of the Royal United Services Institute, claimed meeting 3.5 per cent by 2035 would cost an extra £40billion a year and said this was equivalent to raising overall income tax receipts ‘by 10 per cent’.
Former Army chief Lord Dannatt said: ‘I would make the case that we have got to tighten our belt. And if we can’t borrow more, which we can’t, if we can’t grow the economy, which we’re struggling to, then we’ve got to put some taxes up.’
Official figures show Labour’s current plans would see spending on sickness benefits rise faster than that on defence. Despite planned cuts to disability benefits, spending on sickness and disability is forecast to rise from 2.4 per cent of GDP to 3.1 per cent by the end of the decade, reaching almost £100billion a year by 2030.
Former Tory chancellor Jeremy Hunt said yesterday that welfare reform was the ‘only way’ to square the circle.
Rachel Reeves and Defence Secretary John Healey speak with soldiers and staff at the Stanford Training Area on October 20, 2024 near Thetford, England
Romania’s President Nicusor Dan (left) speaks with Ukraine’s President Volodymyr Zelensky next to NATO Secretary General Mark Rutte during the Vilnius Summit of B9 (Bucharest Nine) and Nordic countries in Vilnius, Lithuania, 2 June 2025
Challenger 2 Main Battle Tank during a training exercise on Salisbury Plain Training Area on 3 July, 2020 in Salisbury, England
Mr Rutte is expected to set the minimum defence spending target when Nato leaders gather in The Hague, Netherlands, on June 24.
The target will be supplemented with an additional goal of spending 1.5 per cent on security- related activity, taking the total to the five per cent demanded by Mr Trump.
But former Nato chief Lord Robertson warned that many countries would struggle if the aims are set too high.
The Labour peer, who led the Government’s review, said: ‘I can see why Nato is giving targets but whether they are realisable is a different question altogether.’
