Labour’s welfare U-turn spikes fears of tax hikes
The Labour government has confirmed its latest U-turn with a significant retreat on welfare reform dealing a crushing blow to Rachel Reeves’ waning fiscal headroom.
The bill initially targeted restrictions on personal independence payments (PIP) and limited the sickness-related element of universal credit in a bid to shed £5bn from the welfare budget by 2030.
Under the new concessions, people who currently receive the personal independence payment (PIP) will continue to do so, meaning nearly 370,000 will not lose their benefits.
But the Institute for Fiscal Studies (IFS) has warned that this move alone is set to cost the government at least £1.5bn.
The government had also aimed to cut the health element of universal credit to £50 a week for new claimants and freeze the current rate, which is claimed by over 2m people, at £97.
Work and pensions secretary Liz Kendal confirmed this would be adjusted to “make sure all existing recipients of the UC health element – and any new claimant meeting the conditions criteria – have their incomes fully protected”.
The IFS said the move could add an extra £700m to overall spending in 2029/30, when the number of new claimants of the health element is set to top 700,000. Analysts said the costs would mount to “significantly more once the policy is fully rolled out”.
Tax hikes expected to fund concessions
Eduin Latimer, senior research Economist at the IFS, said the scaling back of measures would “naturally” require the government “to raise taxes or find other savings elsewhere”.
Labour was expected to face a revolt of 126 MPs if the party tried to pass the bill in its original form.
Shadow Chancellor Mel Stride said the “screeching U-turn” marked “another unfunded spending commitment”
The move is bound to be another headache for Reeves, who had banked on the flurry of cuts in order to maintain her wafer-thin fiscal headroom of £9.9bn.
Economists warned earlier this month Reeves’ £190bn splurge in the Spending Review was set to open a £23bn black hole if growth figures continued to perform poorly.
This has led City analysts to believe the only way out for Reeves would be finding further cuts or ripping up her fiscal rules, which dictate that tax receipts must fund day-to-day spending.
But the Chancellor has reiterated her rules were “non-negotiable,” raising concerns of another round of hefty tax hikes in the Autumn.
Reeves has vowed to not repeat the “scale” of her last budget – where she launched a near £40bn tax grab – but analysts have warned the renewed U-turns leave little options.
The Labour government blinked on winter fuel payments earlier this month, returning payments to some nine million pensioners, marking a £1.3bn blow to Reeves’ fiscal standing.