Lord Keynes told us in 1941 how to pay for defence. We should follow his advice. The last people who should pay for it are those most dependent on the state. It's the richest who should be covering the cost.
This is the audio version:
This is the transcript:
How are we going to pay for the defence of the UK is a fundamental political question of the moment because, as we all know, Putin and Trump have now become the most unlikely allies on the planet and are threatening Europe with the potential risk that unless Europe is willing to defend itself, we may be vulnerable to attack from either of them.
And I do stress, literally either of them, because it appears to me that Trump has already declared war on Europe through trade means, and so who knows what else he might do?
The response is to say that the UK must increase its defence spending.
Now, UK defence spending at present is approximately 2.3 per cent of our national income. Our national income is, roughly speaking, £2,800 billion a year at present and therefore, we are spending £60 billion a year on defence.
Trump's demand is that we increase this to 5 per cent of our GDP, which would be £140 billion a year. And frankly, no one believes that this is credible because there aren't the people to spend that money on, and there isn't the defence equipment to buy for that money because we don't have the capacity to make it, and, therefore, that's a stupid number, along with most things that he says.
But it is plausible that we could increase our defence spending. We could increase it to 2.5 per cent, which would then increase the spend to approximately £70 billion a year. So we'd need to find maybe up to £10 billion a year to do that.
And if we were to go to 3%, we could go to something like £84 billion a year, and that would be an increase of £24 billion.
And all the economic commentators that I see on the television, all of those who are on the mainstream channels, are all hanging their heads in horror and saying, “This is going to mean a cut in pensions”, or “This is going to mean a cut in welfare benefits, this is going to remove the social safety net, or the government can no longer do anything with regard to climate change because we're going to have to spend money on defence”, and let me tell you, all of that is simple, straightforward nonsense.
The answer is that we must do what John Maynard Keynes suggested in 1941 when he wrote a book called How to Pay for the War.
Now we're not at war at present, we are paying for the continuing peace, I hope. But his radical plan for the chancellor of the Exchequer, which he wrote at that time, and which was immensely popular and fundamentally changed the way in which economic management took place in the UK during the later parts of the Second World War and thereafter, was absolutely fundamental to the process of victory at that time.
So, I want to highlight the key message that he made, and the key messages were, in fact, twofold.
One was, he said, that we must tax the rich more because they've got the money, and they must, therefore, make the sacrifice because we can't ask what he would have described as ordinary people to make that sacrifice because we're also asking them to serve in the front line to deliver the victory that we need. It was not possible to ask those people to give more than they already were, because they had nothing more to give, whereas the wealthy clearly had got more to give.
They could give more money, and they could give something else, which was their consumption. They could give up things and still live a good life, whereas those who were on low levels of income could not.
And very little has changed between 1941 and 2025. It is still true that the wealthy do have the money, and the wealthy have the good life, and that there are vast numbers of people in the UK who have very little more they can give because they simply don't have enough already. So, we can use the lesson that Keynes gave us. We should be taxing the rich more because they are the people who should be paying for the peace if that is what we are trying to preserve.
And if we need a figure of between £10 and £24 billion, where could it come from?
Well, I wrote the Taxing Wealth Report. It was published in April 2024, and it remains as relevant now as the day when I produced it, because what it provides is a range of choices of tax changes that could be made in the UK to deliver income to the Chancellor of the Exchequer by asking for greater contributions with those with wealth in the UK, but having no impact at all on those on ordinary levels of income. So let me give some examples of where the money might come from to pay for the defence that we need to ensure that we have a continuing peace and not a war.
Suppose that we need more than £10 billion. The first thing that we could do is quite simply restrict tax relief on pension contributions in the UK to the basic rate of income tax, so that everybody gets the same rate of tax relief however much they earn. In other words, you do not get more subsidy for your wealth if you are wealthier than you do if you are a basic rate taxpayer, which is what happens at present. We have a perverse system which actually subsidises the savings of the wealthy more than it subsidizes the savings of those who are on low incomes. And you could not make up a more stupid system of incentivisation for saving than that. If we were simply to equalise the rate of tax relief, which I think would be a definition of fairness, that we could raise £14.5 billion
a year of extra tax for the government. That would be ample enough to go well over 2.5 per cent defence spending. It would push us towards 3 per cent defence spending. In other words, this goes a long way towards achieving our goal.
But it isn't the only thing we could do. There's plenty of other options. We could, for example, align the capital gains tax rate with the income tax rate in the UK - a perfectly sensible thing to do because both capital gains and income end up delivering pounds into people's pockets. The tax system should be indifferent as to where that pound came from. It is fair that the tax system is indifferent in that way because both income and capital gains enrich a person and there's no reason why one should be taxed less than another except for the fact that our tax system is biased to the wealthy and, basically, you've got to be wealthy to have a capital gain. If we equalize the tax rate on income and capital gains so that a person always pays their highest marginal rate of income tax on the gains that they made, then we could deliver an additional £12 billion of tax revenue to the government each year. So, on top of the change I've already suggested, that's over £26 billion we can supply, more than enough for everything that we need.
But just in case we need other choices, we could, for example, reform corporation tax. Corporation tax is in a total mess in the UK. It isn't charged on hordes of companies. We know that's true because we have lost control of company administration in this country. If only we required that banks tell the Revenue each year which companies they provide services to, so that the Revenue would know which companies they expect to pay corporation tax, I estimate that we could raise another £6 billion of revenue a year. And we'd have a more vibrant economy because the cheats would be forced to pay tax.
If we also took away the protection of limited liability from those directors who cheat the system and, as a consequence, do not pay the tax liabilities that they owe by leaving them in companies that they allow to be struck off by Companies House, we could raise, potentially, another £6 billion in a year.
And if we increase the rates of corporation tax in the UK for larger companies to the rates that are commonplace around the world, we could raise another seven billion pounds of corporation tax a year. From corporation tax, we could, then, raise another £19 billion, and I can keep going.
For example, we could recreate something that we had for a long time called an investment income surcharge in the UK. This is, in effect, a national insurance charge on things other than work. Why is it, after all, that work has the highest tax rate in the UK, but if you get your income from savings, investments, rents, trust funds and everything else, well, that gets a lower tax rate? This is perverse, stupid, unreasonable, unfair, irresponsible.
I could carry on with that list. My point is simple. We should be charging the equivalent of National Insurance on such unearned income sources, and if we did, my estimate is that we could raise about £18 billion in that way, and only the wealthy would pay.
And finally, we could abolish the VAT exemption on the supply of services by banks. Why would that be relevant for the wealthy? Because only they buy financial services. As a matter of fact, the vast majority of people on low incomes pay very little to banks for the services that they buy from them because, frankly, all they need is a cheque account or an ordinary deposit account, and those do not have charges of any great consequence levied on them.
But financial services advice is a valuable service to the wealthy. And yet, it has no VAT on it, which is absurd. We could get an additional £8.7 billion from there.
This Is my key point. Very obviously, we don't need to do all the things I've just outlined.
We might do because we have other uses for money, and we do need to charge tax to balance the effect of spending on things like the Green New Deal, on better education, on better health service provision and everything else.
But for the sake of defence, we don't need all those things. But what we definitely also don't need to do as a consequence of having these options available is cut pensions, or cut social security, or cut education, or cut the NHS, or any of the other fundamentally important services on which people rely. We could quite simply pick from that list and make some of those changes and more than cover the cost of the defence that we need in this country now. And it would all be paid for by the people who have the opportunity to forego something to ensure that we're safe, who are the wealthy, because nobody else can afford to do so.
This is what justice would look like.
This is what fair defence would look like.
This is what a country which was being governed by people who realise the resources that are available to them, and that most people don't have them.
But we're having a debate which suggests that in practice, the price of defence is going to be borne on the shoulders of those with least to pay, and that makes no sense at all.
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I found it yesterday. Who do we have today of this stature?
https://ia601508.us.archive.org/18/items/in.ernet.dli.2015.499597/2015.499597.HOW-TO_text.pdf
Excellent as always. I question one small point: I think we ARE at war, and have been for quite some time, in a very twenty-first century way, involving funding politicians, running disinformation bot farms, and so on. Brexit was the first major battle the UK was involved in, and our politicians and our courts completely failed to defend us. It’s time we woke up (pun intended).
I tend to agree with you
I agree with this. Rearmament is not, however, enough by itself.
I am running a thread on my Facebook page about Russia’s objectives. Briefly I argue Russia wants to re-incorporate the European nations of the old Tsarist empire. They want to achieve this by hybrid war-threats of force, propaganda against the West, cyber war and alliance with Far right groups in Europe and America.
The aim is to effectively disarm Eastern Europe ( see proposed treaties of Dec 2021)and dominate them as the USSR did Finland in the Cold War. They would veto which films were shown for example or even who was in the government.
The reason is to Make Russia Great Again -a revenge for the humiliations of Russia after the USSR; to boost the prestige of Putin’s party inside Russia, to increase their standing in the BRICS (China is the main power unlike the 1950s) and humiliate the EU.
In 2013 Ukraine signed an agreement with the EU to join at some point. Yanukovych tried to reverse this but after the Maidan protests, fled the country. Following elections saw pro-Eu parties . Russia then resorted to deployment of troops in Crimea and Donbas.
NATO eastward expansion was no threat to Russia. The real threat to Putinism are the values of the West. We know how flawed they are but they exist-free elections, a media which can dissent, and regulations against corruption. Europe is still much more prosperous than Russia. Russia constantly runs anti-EU propaganda and RT supported Brexit.
BUT these freedoms need to be improved. We also need to move away from neo-liberalism to the sort of economics Keynes advocated. This would improve the condition of all of us. We need to do it for ourselves.We need a re-distribution of wealth. But it would also be a potent means of self defence. Tanks can’t keep out ideas. Communist eastern Europe died with a whimper, not shooting.
I would suggest Taxing wealth is an important part of an alternative to the political economy we have and an ingredient of our defence
Thanks. spot on…. the Wealth Report just keeps on giving.
My gripe about the numbers game is the focus on money. It is not money that will defend Europe, it is brave, committed people who are well equipped and well trained. So, we need to address those issues directly remembering that other Keynes saying “anything we CAN do we can afford to do”… so, please Keir Starmer/John Healey talk about this rather than money.
Much to agree with
When we talk about taxing the rich to pay for defence, I’m always reminded of my Grandfather. During WWII, he was a concientious objector. When he refused to be drafted to fight, he was taken in front of a judge to explain himself. The judge asked him “Do you not want to fight for King and Country?”
His response was “King and Country? It’s not my country. I don’t own any of it, not even the slum I have to bring my family up in. If you want to send someone to fight, send the Duke of Argylle, he has more to lose than I do.”
It strikes me that the world would be a better place if we sent the wealthy to fight, and not the poor, since the wealthy are the ones with something to gain or lose.
Hi Richard, I’m really confused. Previously you’ve said that taxes simply cancel money and don’t pay for anything but now you’re saying the government needs to use tax as revenue to pay for things.
I thought I was beginning to understand MMT but it seems I really don’t.
If the governmment is going to spend more and there is a shortage of resources it has to:
a) Tax to reduce demand for goods and servcies and so create capacity for itself to spend
b) Remove the funds injected into the economy to control inflation
This is what MMT says.
It never says the government can just spend without considering the consequences. Tax is one possible consequence. It would be in this case.
Very good points. There is certainly a shortage of peopled trained to do useful things. Instead, they are employed doing useless things – Amazon? All the companies with under-paid overstressed courriers (all the wasted fuel). All the people delivering meals to those that seem to have lost the capacity to.. cook.
Tax the hell out of some parts of the economy, heavily invest in training focused on more useful parts.
As for the rich.. perhaps it is time their re-learned to cook.
Thank you, Richard.
In 1914, soon after the outbreak of World War I, Nathan(iel) Rothschild was asked for advice by Lloyd George. At his first invitation to confer at the Treasury, when asked what could be done to raise more money for the war effort, Rothschild reportedly answered: “Tax the rich, and tax them heavily.”
And he was right
It is obvious that the wealthy have to pay, because they are the ones with the money and other assets, and defence spending is protecting those assets which would be at risk of damage or destruction in a conflict. In a war, the poor will also pay, but with their lives.
The UK was spending 5% of GDP on defence as recently as 1985. It was almost monotonically down from then until 1999 and has not exceeded 2.5% since then.
https://www.statista.com/statistics/298527/defense-spending-as-share-of-gdp-united-kingdom-uk/
Increasing headcount is necessary and would be expensive. Clothing, housing, training and equipping them would also be expensive. I have no doubt we ramp up defence spending to 5% without too much trouble. Ships, planes, armoured vehicles, artillery, and drones.
For some reason the right is much happier spending public funds on such things than on the well-being of our people.
Thank you to the ever-resourceful Ian Stevenson.
I note that Keynes makes much of the cost of ‘doing nothing’ – Starmer please note.
I also agree that hubris had dominated Europe/the West for some time – wars have have been everywhere – the Breton Woods institutions were faulty right from day one because they became vehicles for the hegemonic U.S. to lay down the law under the guise of the worlds policeman, grabbing the world’s resources and increasing the value of it currency.
Looking at Keynes work, I am reminded how much knowledge we have squandered over the years whilst giving in to the self interest of the mob that called itself the Mont Pelerin society.
What a tragedy and to be living at a time when the chickens are all coming home to roost.
Much to agree with
Thank you Pilgrim
I was curious to revisit this so yesterday went to Amazon books to see if there was copy to buy. A hard back reprint is £19.06 and the paperback -£473.50 !!!
The book The Battle of Bretton Woods by Benn Steil shows that Keynes had to give way to Harry Dexter White who lead the negotiations for the new world order.
Reeves the Reiver. Robbing those who can least afford it.
Thank you Richard for explaining all this in everyday language. I’m beginning to “get” at least some of your ideas now (and not just in the above post). Very grateful for your writing – I’ve always been a useless at money person (other than spending it of course!), now I’m beginning to understand it at least a little more. Keep it up! (winky face) Best wishes from surprisingly sunny Liverpool.
Thanks
Richard, bravo.
The fundamental point you make is the most important – that the people who will be asked to pay actually have nothing left to give.
It makes no economic sense to try and take money from people who don’t have it. And if Kendall gets her way, millions more won’t have any either. Setting aside the moral aspect (which I’m loathe to do, but….) it is simply not possible to extract pound notes from an empty wallet.
Surely even the innumerate Reeves must see that? She keeps rattling on about being “unable to spend money we don’t have” and maybe we could turn that against her.
The £60 billion we are already spending is already an enormous amount of money. Are we to increase it, just because Trump tells us to? Instead, spend it better? Decrease it and spend it on more useful things? We are a smallish country pretending and failing to be a world power. Nuclear submarines, sending an aircraft carrier to China, the navy in the Black Sea. All mixed up with a weird distortion of national pride, like its some sort of sporting match. What defence do we actually need? How much of it can be in cooperation with the rest of Europe? Europe as a whole spends a fortune on defence, second only to America. Spend it better? Negotiate better?
Me, I don’t think Russia is likely to invade the rest of Europe, but the eastern countries that lived under the USSR might not be as casual with that prospect. America really isn’t our friend, but then neither are our governments. The Great Game goes on, and whatever we think, we are a minor part, a vassal state. Blowing up the gas pipe is only a part of it. Energy bills, food inflation, increased militarism. The EC looks weaker than at any time I can remember. Governments using the war to justify massive increases in defence spending. Germany is now back in the game, for the first time since World War II, northern countries have dropped their traditional neutrality.
Richard, is there not a danger that someone who doesn’t know you better will see this video as saying that the government has to tax in order to spend?
If you spend and you are at or near full empployment then you havwe to tax
But you have to get the thinking the right way round
Stephanie Kelton would completely agree
This is what MMT says
I think MMT says that you have to tax to spend, to prevent inflation, if you are near the limits of your real resources. Employment is only part, albeit an important part, of our real resources. Our unemployment could go lower. And we would have more people resources if ithe government spent properly on health, education, and other things.
I think it is difficult to argue that we are near the limits of our real resources when growth is flatlining about zero. 2% real growth doesn’t seem unrealistic. Real growth could be, can only be, engendered by more government spending – even on defense. With an economy worth £2.5 trillion, that’s an extra £50 billion per year. So I am less pessimistic than Richard that we have to tax for every extra pound we spend given the current state of our economy.
2% growth when we are already well beyond planetary capacity is absurd Tim. How can you think otherwise? We are over-exploiting our planet now.
You rnalysis makes no sense, at all. Sorry. And your MMT interpretation is decidely limited. I am writing a post about that now.
Not paying for defense in the short term risks a much heavier cost later. That may be in blood and gold if active hostilities break out. Or it may be in the loss of our liberty.
Before the second World War UK spending was about 9% of GDP, during the cold war about 5%. Even 2.5% of GDP seems pathetically inadequate in the current circumstances.
Certainly we can’t suddenly increase our expenditure, though we could do a lot. But we should be ramping up our expenditure over the next few years, if it is not already too late.
No one wants war. But the best way to prevent it is to be prepared. A failure to prepare is to prepare for failure. And failure of defense is a really bad option.
And, of course, of course, the cost should not be foisted on the poor in our society. If nothing else it is the rich who gain most, and stand to lose most from war.
I like your list of ways of raising revenue. Though this should not just be for defense. What is the point of defense if we don’t have a fair and functioning society? We also need money for health, education, justice and many many other things. Don’t let’s just focus on raising money for defense.
But we should not forget that defense spending can have a stimulative effect. We certainly need a stimulus at the moment. And it is much better than the quote from Keynes that, “The government should pay people to dig holes in the ground and then fill them up.”
[…] have, for example, noted comments on YouTube that are particularly critical of my latest video on how we might pay for defence. Their accusation is that because I suggest that we need to increase tax on the wealthy if we are […]
These tax raising suggestions are all things we – that is to say, our ‘Labour’ government – should be doing already. All of them greatly preferable to employers NI increase or ill thought through IHT on farms.