The Strategic Defence Review means crunch time for Labour on tax rises and spending cuts

In the months leading up to the general election, Labour made a calculated decision to rule out a wide range of tax increases – a move designed to signal fiscal responsibility and avoid political backlash. However, what once appeared to be prudent politics has now become a serious strategic misstep, one that is increasingly undermining the government’s capacity to deliver on its most ambitious goals.

First through the green energy transition, then through the drive to accelerate housebuilding, and now, in the massive defence investment laid out in the government’s Strategic Defence Review, Labour finds itself searching frantically for levers it can pull to generate growth that the electorate will notice. 

The party has embraced a bold vision for national renewal yet remains trapped in a fiscal cage that is, at least partially, self-imposed. This will almost certainly have significant implications for next week’s Spending Review and the coming Autumn Budget, with rumours of Cabinet splits and departmental budget cuts already circulating in the media.

While voters welcomed Rachel Reeves’ fiscal orthodoxy in the wake of Liz Truss’ short-lived premiership and its accompanying bond market crisis, there are different ways the Chancellor’s fiscal rules can be met. But meeting them through rowing back on promises to deliver much needed investment in growth and public services in order to keep election promises on tax is a solution that will satisfy very few.

On Monday, economists warned that significant tax rises are inevitable if the Strategic Defence Review’s recommendations to bolster the UK’s defence capabilities are to be delivered. 

Despite this, the Prime Minister has insisted he is “100% confident” that the plans can be delivered within current funding parameters. From 2027, defence spending will rise to 2.5% of GDP, with an aspirational target of 3% during the next Parliament. Yet without new revenue streams or brutal budget cuts, it is difficult to see how the government could hope to achieve these targets.

Labour’s unwillingness to countenance most tax increases up to this point, with the much remarked upon exception of Employer National Insurance, has severely restricted the government’s room to manoeuvre. This is a consensus which is likely about to shatter, with Defence Secretary John Healey recently refusing to rule out tax rises to pay for the planned defence spending increases. Now, on the precipice of the Spending Review, two critical questions remain: where might the government choose to pull in additional tax revenue, and which elements of Labour’s agenda could be pared back to redirect existing funding to defence?

Following his historic general election victory last year, many Labour-watchers wondered where the ideological divides would emerge within Keir Starmer’s Labour Party – particularly amongst the large and largely unknown crop of new Labour MPs. While we have already seen stirrings of rebellion on issues such as the two-child benefit cap, how the government chooses to answer these two questions is likely to throw divisions into much sharper relief.