Biting the bullet

Starmer should get real about defence and taxes

Keir Starmer is going to put up taxes. He probably doesn't want to. He knows it is politically toxic – both going back on a key election pledge and reaffirming voters' most significant suspicions about Labour. The Treasury is well aware of the economic consequences. But there will, ultimately, be little else he can do. The public sector will not stomach more cuts, and demand for services will keep rising. With the costs of borrowing also heading up, it is about the only lever that can be pulled.

In the aftermath of the last fiscal statement, Sam Freedman laid out the predicament the government was in: Starmer and Reeves were buying time, the walls closing in on them. Now, with Trump's election, the squeeze has gotten tighter. There is economic uncertainty around trade and tariffs, which is likely to squeeze growth. Then, there is the spending pressure caused by America's retreat from Europe.

The increase in defence spending this week was a welcome one. It was not, however, a major move or even a sufficient one. A chunk of it was accounting trickery. The transfer from official development assistance was a politically easy choice, but it was one that hid the complexity of that money. Currently, the money really sits in the hands of the Home Office and is directed to supporting refugees (both in hotels and the various Ukraine schemes). Relinquishing it will be a bunfight, one which has already started and reached a deadlock. Even then, the figure sits below what most agree is credibly needed to get our armed forces anything near fit for purpose.

More hawkish experts are suggesting that something close to 5% of GDP will be necessary. Poland is set to spend 4.7%. Going above 3% is probably required, and such a structural and strategic change can't be found through borrowing. Making the change revenue-neutral will be difficult, too. Spending more on defence would mean cutting other spending – which is already under the cosh. Getting to 3% spending on defence would mean cuts of about 4.6% per year in different departments. Given the state of, well, everything, those would be hard to find and unpopular to implement. There is but one other option – taxes.