The background
The new Trump administration in the USA has cast serious doubt on its commitment to the NATO transatlantic alliance and the defence of Ukraine. If true – and recent statements and speeches by the four most senior elected US officials suggest it is the case – this would represent a complete reversal of established Western defence policy dating back to the formation of NATO in 1949.
Faced with an extremely aggressive and destructive Russia, whose army is inflicting widespread death and destruction in Ukraine, and whose military, intelligence and propaganda programmes are causing mayhem elsewhere in Europe, NATO is suddenly severely weakened by the US U-turn.
For decades, the USA has been the major military power within NATO and has provided a nuclear umbrella to deter Soviet Russia and, more recently, Russia itself, from taking serious, aggressive action. European countries have relied too much on this US military force to reduce their own forces and military expenditure, even though for many years Russia has been threatening and invading other states on its borders, such as Georgia, Armenia, Kazakhstan and now Ukraine.
Governments often claim that defence of the realm is their top priority. But since the end of the Cold War in 1989 with the fall of the Berlin wall, Western governments have taken a peace dividend, cutting their defence expenditure to increase outlay on other domestic priorities. In the UK, defence spending was 5.5% of GDP in 1984, at the height of the Cold War, falling to 2.0% in 2015 and 2.3% in 2024, with the number of trained, full-time troops falling from 100,000 in 2000 to 70,000 now.
Admiral Sir Tony Radakin, the Chief of the Defence Staff, stated recently that the British army is weaker than it should be because of “historic underinvestment” that has resulted in “deficiencies in people, equipment, stockpiles, training, and technology”. General Sir Nick Carter, former head of the UK Armed Forces, said the Army was “remarkably hollow” after a “process of neglect” over the last 30 years. He warned that it would be “unsustainable” were Britain to suffer a similar “onslaught” of Russian drones and missiles, as happened in Ukraine.
Across Europe, particularly in NATO countries, it is now widely recognised that in the face of the current Russian government’s aggression, peace dividend savings have been wildly overdone over the last 40 years, and military spending must now be increased rapidly. Some say to 3%, some say to 5% of GDP.
The UK Government launched a Strategic Defence Review in July 2024, with plans to report its findings in the first half of 2025. This is intended to examine all the strengths, weaknesses, opportunities, and threats facing UK’s defence within the proposed 2.5% of GDP for defence spending.
The US policy reversals on Ukraine and NATO should put rocket-burners under this increase. But even given the joint Russian/US plan to force Ukraine into an extremely unfavourable peace deal, and the wider threats to the continent from Russia, governments may drag their feet. National budgets are strained, and populations in many countries are feeling the effect of the high cost of living.
What should the Labour government do now?
The military situation is now absolutely critical and urgent. Senior UK military people have said repeatedly that the UK military is not capable of undertaking a sufficient peacekeeping mission in Ukraine or acting as a serious bulwark against a Russian attack. There are now so many deficiencies, shortages, and gaps, and these shortcomings would be exposed even more seriously if the US were to withdraw its contribution to NATO, or even if it delays or prevents the supply of US equipment to the UK and other European countries.
A slow military build-up based on modernising and upgrading the military and gradually increasing spending to a maximum of 2.5% of GDP over the next three years, depending on the performance on the UK economy, is very clearly far too little and far too slow to meet the immediate need. The Liberal Democrats have proposed aiming for an increase of 3%. In the current crisis, even that is too little.
Labour was elected to government in July 2024 partly on the back of public dissatisfaction with the performance of the Tory governments of 2010 to 2024. But the public mandate was not overwhelming at 34% of the vote share, and much depended on Labour delivering on its manifesto promises. Some of these have been kept, but many supporters are disappointed, and the latest polls put Labour at about 24%.
The reasons for this decline are complex, but lie almost exclusively in the stretched public finances that are limiting the government’s ability to meet the expectations of its supporters. All public services now desperately need new investment to correct years of neglect and austerity. This includes crumbling educational facilities, hospital bed shortages and maintenance backlogs, huge court backlogs, shortage of prison facilities, stretched local government finances, and much more. But the Chancellor is now preparing a new Comprehensive Spending Review, which is likely to see even greater cuts to departmental spending, with the exception of protected areas.
Maynard Keynes once said that if the need is great, the money can be found. The need is certainly great and urgent now.
During the Second World War, the UK borrowed billions of pounds from the USA and Canada, but at a low interest rate, and repayment scheduled whenever feasible. The national debt rose to over 200% of annual GDP. But it would be a bad idea to increase the national debt now to invest in a bigger military. Interest rates are much higher now, and further borrowing would worsen the UK’s credit rating and lead to even higher interest rates.
If these further borrowing and further departmental spending cuts are highly undesirable and should be ruled out, other serious options for raising the necessary funds must be found.
Financing an increase in military spending
This can be done in several ways:
1. Increase the GDP growth rate, which would increase tax revenues, by:
- Following the example of Spain, which is currently experiencing annual growth of over 3% which Prime Minister Pedro Sanchez attributes to policies that welcome immigrants into the workforce and make it easier for them to contribute to the economy. This was crucial for prosperity, he said.
- Rejoining the European Union Single Market. It is estimated that this would increase GDP by 4%.
- If not b), then, based on a new report by Best for Britain, an EU/UK Agreement for Deep Regulatory Alignment, which would deliver GDP growth of between 1.7% and 2.2% – less if services were not included,and less if Trump imposes tariffs. See also Chris Grey’s blogpost for more details.
- If not b) or c), then the Government’s EU reset would offer an estimated increase in GDP of between 0.3% and 0.7%. See Chris Grey’s blogpost.
2. Raise income tax for wealthier people, and increase tax on unearned income
The highest rate of income tax peaked in the Second World War at 99.25%. It was then slightly reduced and was around 90% through the 1950s and 1960s. In 1971, the top rate of income tax on earned income was cut to 75%. A surcharge of 15% kept the top rate on investment income at 90%. In 1974, the cut was partly reversed and the top rate on earned income was raised to 83%. With the investment income surcharge, this raised the top rate on investment income to 98% – the highest permanent rate since the war. This applied to incomes over £20,000 (equivalent to £263,269 in 2023).
We are not at war at the present time, but we urgently need to better prepare ourselves for it.
3. A wealth tax
Tax Justice UK proposes a 2% levy on individuals who own assets worth more than £10 million – this would affect 0.04% of the UK population and raise £24 billion a year. This proposal is backed by many MPs and peers in Parliament. They are also campaigning to apply national insurance to investment income, which would raise up to £10.2 billion a year.
Conclusions
With the collapse of the transatlantic alliance and the withdrawal of the US-backed NATO security guarantee, the United Kingdom, along with the rest of Europe, including Ukraine, faces the greatest threat to security and a democratic society since 1939 and the peak of the Cold War. Funding needs to be raised urgently and quickly to modernise and expand the UK military to adequately counter this threat
The tax-raising measures proposed above are fully in line with Labour Party philosophy of working towards a more just and equitable society.
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