MoD: Royal Navy, British Army and RAF spending increase could be axed due to "unsustainable" debt, peers warn

Sir Keir Starmer’s administration must make “painful” decisions on spending and taxation within this Parliament and “muddling through is not an option”, the Lords Economic Affairs Committee (EAC) said. They added that the debt situation could become “unsustainable” unless the government chooses between tax rises and the state doing less and changing its fiscal rules.

The Labour Party promised to increased defence spending to 2.5 per cent of Gross Domestic Product (GDP) as part of its election manifesto. A Defence Strategic Review is being carried out, which will look into the size of the Royal Navy fleet and other areas. Mr Starmer said any rise in armed forces spending will be decided upon after the review is completed, which is due to be published at the beginning of 2025.

He previously added that a roadmap is in place for any potential rises. Opposition politicians have criticised the policy over a “lack of clarity”. In a report published on Tuesday, the EAC concluded that the UK has a “flawed” fiscal rule – that debt as a percentage of gross domestic product (GDP) should be falling over a five-year period.

This rolling target can be easily “gamed”, with the possibility of debt rising for four years and success being claimed if it falls in year five even if it is higher than in year one, the committee concluded. The rule, which was created by the former government and adopted by the new administration in a similar form, should be replaced by one with a fixed date in the fifth year in order to properly hold ministers to account, it said.

The conclusions come as the Government faces mounting pressure over its tax and spend plans, including plans to scrap the winter fuel allowance for all but the country’s poorest pensioners. Ministers insist the cut is necessary to fill a £22bn “black hole” in the public finances left by the Conservatives and Chancellor Rachel Reeves has hinted at the prospect of some tax rises on the horizon in the autumn Budget.

The competing demands of increasing defence spending, supporting an ageing population, transitioning to net zero and the prospect of interest rates exceeding the growth of national income mean that Labour continues to face “painful choices on spending, tax and borrowing”, the committee warned. Growth was stronger than expected in the first half of 2024, but the EAC said it was not convinced that upswings could be relied upon to avoid pressure on the public finances, nor that productivity alone can offset the projected rise in Government expenditure.

The EAC report said: “If we wish to maintain the level and quality of public services and benefits that we have come to expect, we face a choice: taxes will need to rise or the state will need to do less.” Ms Reeves has not ruled out raising some taxes in the Budget later this year, but has committed to safeguard the UK’s main revenue raisers of VAT, income tax and national insurance.

Lord Bridges of Headley, chairman of the committee, said the report highlighted a “grim reality: our national debt risks developing on an unsustainable path”, which has not been given enough attention in part “because of a flawed debt rule”.

“If we are to tackle the serious risks we face, muddling through is not an option,” he said. “To put debt back on a gradual, downward path, tough decisions must be taken in this Parliament. And we need a revised debt rule that has teeth and holds ministers to account.” The government has been contacted for comment.