Starmer plays a risky game on welfare reform
Rightly or wrongly, Labour decided that the first signal they should send as a new government was that they wouldn’t duck tough economic decisions. The cut to the winter fuel allowance was offered up as the ultimate proof of their seriousness; politically difficult but, we were told, financially necessary.
A direct line was drawn between this controversial welfare cut and the “£22bn blackhole inherited from the Tories.” Ministers went as far as to say that the move was necessary to “prevent a run on the pound” – a farcical claim at the time, rendered more so by last week’s decision by Keir Starmer to row back from the policy.
In doing so, the signal that Rachel Reeves worked so hard to establish in the minds of investors is now on the blink. With Labour MPs asserting themselves, other welfare cuts could also fall by the wayside, including changes made to disability benefits and a possible reversal of the two-child benefit cap.
This change in direction is understandable from a political perspective given that many Labour MPs feel deeply uncomfortable with the cuts while Nigel Farage’s Reform party tries to outflank Labour on the left by vowing to protect large parts of the welfare budget. But these moves cost serious money, so where does it leave the Chancellor and her “ironclad” fiscal rules?
Those rules are already most likely shot to pieces given the poor state of economic growth and grim news about the public finances. The government borrowed £20.2bn in April of this year, mostly due to higher spending commitments in the form of public sector pay and of course debt repayments. The Office for National Statistics said government borrowing in the financial year 2024/25 was £148.7bn – £11bn more than the OBR had forecast.
Most economists and think-tanks expect the Chancellor to implement hefty tax hikes in the Autumn in order to stay within her self-imposed limits. But there is another option: abandon the fiscal rules entirely. Doing so would leave Reeves humiliated, given the importance she attached to the policy, and no amount of sophistry could adequately explain why the rules were vital in 2024 but expendable in 2025.
It seems that politics is finally catching up with Labour’s economic policy, and sooner or later something – or someone – will have to give.