Resolution Foundation urges Healey to raise taxes on middle earners to fund defence pledge
New report argues the UK’s tax wedge remains low by international standards, requiring an estimated £28bn annual increase from average workers to meet the 3.5% GDP defence target by 2035.
The Resolution Foundation has advised Chancellor John Healey to increase taxes on middle earners to secure the funding required for the UK’s defence ambitions. In a report titled *Thin End of the Wedge*, the thinktank estimates that approximately £28bn a year is needed to meet Labour’s pledge to spend 3.5% of gross domestic product on defence by 2035. The analysis suggests that relying solely on business or wealth taxes is insufficient to bridge this fiscal gap.
The report highlights that the UK’s “tax wedge” – defined as taxes on earnings minus benefits – remains low compared to international peers, despite significant increases implemented since Labour came to power in 2024. Chief economist James Smith noted that the UK still taxes average earners less than most other nations. He stated that no other OECD rich country has a bigger state and a lower burden on average workers, implying that politicians promising both are not being realistic.
Data from the Resolution Foundation indicates that the tax wedge for a single earner on average pay is currently 32.4%, which is below the averages for both the OECD and the G7 major economies. Although tax rises under previous Chancellor Rachel Reeves resulted in a 2.4 percentage point jump in the tax wedge last year – the largest increase for any OECD country – the overall burden remains historically low. The wedge for a worker on the median salary of £33,000 is also below levels seen before the global financial crisis in 2008.
Chancellor Healey, who resigned from Keir Starmer’s government in June 2026 over defence funding concerns, is currently based at No 11 Downing Street. He has indicated that he will wait until next year’s spending review to present a detailed plan for the defence pledge. However, he must present his first budget on 28 October 2026, where he needs to find approximately £1.4bn a year over the next three years to pay for the existing defence investment plan.
The Resolution Foundation argues that because the benefits of increased defence spending will be broadly shared, the necessary tax rises should also be distributed across the population, including higher rates on middle earners. This approach contrasts with the previous government’s reliance on employer national insurance contributions and fiscal drag, which were the largest revenue-raisers in Rachel Reeves’s budgets before she was sacked by Andy Burnham.
The current government faces additional fiscal pressures, including the need to cushion households against rising energy bills and to support unemployed young people. Andy Burnham has promised to stick to Labour’s pre-election commitment not to increase rates of income tax, VAT, or employee national insurance, a constraint that complicates the task of funding the long-term defence target.
