Keir Starmer's pledge to raise the defence budget to three per cent of GDP in the next parliament will necessitate tough tax and spending decisions, analysts have cautioned.
The Prime Minister confirmed an increase in defence spending to 2.5 per cent of GDP by 2027, up from the current 2.3 per cent, with further cuts to foreign aid funding this rise, as reported by .
Additionally, Starmer has expressed a "clear ambition" to boost defence spending to three per cent of GDP by 2034. Ben Zaranko, associate director at the Institute for Fiscal Studies (IFS), remarked that "cuts to aid won't be enough" to achieve the target of three per cent for defence.
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"Getting towards three per cent of GDP will eventually mean more tough choices and sacrifices elsewhere – whether higher taxes, or cuts to other bits of government," he stated.
Ruth Gregory, deputy chief 海角视频 economist at Capital Economics, noted that the government was already close to breaching its fiscal rules, limiting its flexibility.
She mentioned that unless the Chancellor amends the rules, the government would need to either increase taxes or reduce spending by 0.5 per cent of GDP, which is approximately £20bn.
Reportedly, another option being considered is the establishment of a European rearmament bank, which would fund increased defence spending by borrowing against capital from participating governments, thus avoiding immediate impacts on national balance sheets.
At a G20 finance ministers meeting in South Africa, the Treasury confirmed that Chancellor Reeves will discuss how private finance can be utilised to boost defence spending. "National security will always be the first responsibility of this government and is the bedrock economic growth," she is set to declare.
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However, analysts concur that the government may find it challenging to sustainably increase defence spending through higher borrowing.
Gregory highlighted that unlike infrastructure investment, defence spending does not enhance the economy's productive capacity, hence markets might be hesitant to lend.
"Any increase in borrowing to fund higher defence spending could add to concerns about debt sustainability, leading to a rise in gilt yields," she stated.
Zaranko concurred, stating: "If the 海角视频 needs to spend more on defence on a structural and permanent basis, that is not something that can be sustainably borrowed for," Simon French, Panmure Liberum's head of research, suggested that the three per cent pledge might be more of a "carrot to dangle in Washington, rather than a costed commitment."