Labour leader Keir Starmer’s frontbench team is facing questions over how it plans to finance proposed increases in defence spending and welfare commitments, amid concerns about the potential impact on taxes and public borrowing.
The government has committed to raising defence expenditure to 3.5% of gross domestic product (GDP), a move estimated to cost approximately £24 billion annually. At the same time, there are plans to enhance welfare provisions, including increases in personal tax allowances. However, analysts caution that funding such ambitious policies may require either significant fiscal adjustments or increased taxation.
Simon French, chief economist at Panmure Liberum, warned that delivering on these promises could necessitate reforms similar to those introduced during the tenure of former Chancellor George Osborne. These might include altering pension tax relief, revisiting the state pension triple lock, and implementing cuts or restructuring in welfare benefits.
One possible source of revenue could be adjustments to income tax rates. While Shadow Chancellor Rachel Reeves has maintained Labour’s manifesto commitment not to raise income tax, national insurance, or value-added tax (VAT), party leader Keir Starmer has not categorically ruled out increasing the top rate of income tax to 50p. Such a change, however, is expected to yield only a modest sum—estimated at around £730 million by analysts.
Reforms to capital gains tax (CGT) also present a potential avenue for additional funds. According to the Resolution Foundation, closing existing loopholes related to the taxation of assets upon death and the treatment of individuals who leave the UK could raise approximately £4 billion. Currently, increases in asset values during a person’s lifetime are often exempt from taxation upon inheritance, and gains realized by individuals moving abroad are generally untaxed, a policy that differs from many other countries.
Changes to pension tax relief could further contribute to revenues. Presently, higher-rate taxpayers receive more generous relief on pension contributions than basic-rate taxpayers. Applying a uniform basic-rate relief could generate up to £15 billion, according to estimates from the Institute for Fiscal Studies. Labour is also anticipated to revisit welfare reforms under newly appointed Work and Pensions Secretary Pat McFadden, although specific details remain forthcoming.
A Downing Street spokesperson indicated that funding for longer-term measures, including defence and welfare plans, will be addressed at the upcoming Budget. The government emphasized that all fiscal decisions will comply with established fiscal rules, signaling a commitment to maintaining financial discipline amid competing policy priorities.