Chancellor John Healey faces mounting pressure to increase taxes on middle-income earners if the government intends to finance its significant defence spending ambitions. A new report from the Resolution Foundation, titled “Thin End of the Wedge,” warns that the administration will struggle to raise the required £28 billion annually for its 3.5% of GDP defence target by 2035 without broadening the tax burden on average workers.
Healey, who assumed his role at No 11 Downing Street following a resignation from Keir Starmer’s government in June over concerns regarding insufficient defence funding, has indicated he will wait for next year’s spending review to outline a formal plan. He is currently preparing for his first budget on 28 October, where he must identify approximately £1.4 billion annually over the next three years to support the defence investment strategy he previously criticized as inadequate.
Economists at the thinktank argue that despite £70 billion in annual tax increases since Labour took office in 2024, the UK’s “tax wedge”—the difference between earnings and take-home pay after benefits—remains low by international standards. James Smith, the foundation’s chief economist, noted that while the UK has seen recent tax hikes, it continues to tax average earners less than most international peers.
Data indicates that tax increases implemented by Healey’s predecessor, Rachel Reeves, caused a 2.4 percentage point rise in the tax wedge last year, marking the largest increase among OECD nations. Nevertheless, at 32.4% for a single earner on average pay, the figure remains below the average for both the G7 and the OECD. Smith emphasized that no other wealthy OECD country maintains such a large state while keeping such a low burden on average workers, suggesting that political promises to do both are unrealistic.
The report highlights that the tax wedge for a median salary of £33,000 as of April last year remains low by historic standards, sitting below levels seen before the 2008 global financial crisis. The economists observed that countries with higher public spending typically require greater contributions from average workers rather than relying solely on wealth or business taxes.
The government’s fiscal strategy remains constrained by pre-election pledges to avoid raising income tax, VAT, or employee national insurance rates—a commitment Prime Minister Andy Burnham has vowed to uphold. During her tenure, Reeves relied heavily on employer national insurance contributions and fiscal drag, where frozen income tax thresholds pushed more earners into higher brackets.
Beyond the long-term defence commitment, the administration is under pressure to address rising energy costs for households this winter and to improve employment support for young people. The foundation concludes that because the benefits of increased defence spending are broadly shared, the necessary tax increases should be distributed similarly, including higher rates for middle earners. The report also notes that protesting against what he argued was the then prime minister’s failure to adequately fund defence, healey resigned from Keir Starmer’s government in June. The report also notes that the analysis shows that tax rises under Healey’s predecessor, Rachel Reeves, resulted in a 2.4 percentage point jump in the tax wedge last year – the largest for any country in the Organisation for Economic Cooperation and Development (OECD).
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