Will Rachel Reeves end up being a right-wing Chancellor by accident?
With poor growth and pressure on defence spending, Rachel Reeves faces having to make welfare cuts the likes of which haven’t been since the days of Nigel Lawson. But unlike Lawson, her spending plans are not being driven by a programme of reform, but by panic, says Eliot Wilson
Rachel Reeves cannot have expected it to be like this. The Chancellor of the Exchequer has indulged in some performative shock at the condition of the nation’s finances since her appointment eight months ago, but bad news has been relentless. It is now reported that the £9.9bn of “fiscal headroom” predicted by the Office for Budget Responsibility last October has vanished amid feeble economic growth and persistent inflation.
If the government is to abide by its self-imposed fiscal rules on borrowing and debt – and they are looking like one of the last buttresses of what remains of Reeves’s economic reputation – the Spring Statement scheduled for 26 March will have to include significant cuts in public expenditure. It is widely expected that the Department for Work and Pensions will lose several billion pounds as ministers cut away at the welfare budget.
Welfare cuts will be acutely painful for the government. There was a foretaste of this in July last year when Rachel Reeves announced that the winter fuel payment for pensioners would be restricted to households on pension credit or another means-tested benefit. The same sour taste of disappointment greeted the recent cuts to overseas aid in order to increase defence spending. Many of the government’s natural supporters see these as hard-hearted measures unworthy of a Labour government.
Ballooning welfare costs
It could have been different. If Sir Keir Starmer did not arrive in Downing Street last July on a Blair-like wave of earnest optimism, he took office with general acknowledgement that change was needed and with a degree of licence to bring it about. The UK’s welfare bill is unsustainably high: total spending on health and disability benefits in 2023-24 was £64.7bn, and the OBR has predicted that this will rise to £100.7bn by 2029-30. As a comparison, in 2023-24 the government spent £54.2bn on defence and £44.3bn on transport. Something has to give.
The ballooning cost of welfare has many elements. The number of young people not in education, employment or training has risen by a third since before the Covid-19 pandemic and is rapidly approaching a million. Reeves has argued that there are “perverse incentives” in the benefits system by which people on sickness benefit receive more money and have less incentive to look for work, and privately ministers will talk of “gaming the system”.
Welfare spending will rise to £100.7bn by 2029-30. As a comparison, in 2023-24 the government spent £54.2bn on defence and £44.3bn on transport. Something has to give.
There is some truth in this. The government should have acted decisively, early after the election, to set out at least possible areas of reform, prioritising measures to help people back to work for their own financial gain and wellbeing as well as a contribution to the country’s economic prosperity. When Reeves was shadow work and pensions secretary under Ed Miliband, she spoke of people trapped on welfare. Although she expressed it badly, she was correct to argue that high spending on benefits was a sign of failure, not success.
Instead there has been relatively little sustained activity. Liz Kendall, the work and pensions secretary, launched a “Blueprint for fundamental reform” a few weeks after the election but has since faded from public view. Much political energy was consumed by controversy over the two-child benefit cap; Starmer established a child poverty taskforce to ward off criticism of the policy, which has introduced further delays.
It is easy to disdain political “spin”, but narrative framing matters. The government suffers from an inability to communicate clearly, as well as a propensity to fall into relatively minor but embarrassing bear traps like power struggles inside Downing Street, the acceptance of gifts and hospitality by the Prime Minister and others and controversies over civil service appointments. As a result, ministers seem to voters to be forced into cutting welfare because there is too little money available; this in itself is easily painted as a failure to improve economic growth.
Welfare reform is hard. Voters support the idea in abstract but recoil from the reality of taking benefits away from real-life individuals and the government needed a coherent, consistent, proactive and sustained programme. When Liz Kendall was appointed, 77 per cent of people surveyed had never heard of her. That has fallen to 53 per cent, but barely one in 10 responded positively.
The message is not getting through, and this lands at the door of 11 Downing Street as well. Welfare cuts will come, but they will seem driven by a need to save money rather than as part of a programme of reform. Rachel Reeves could find herself with the reputation of the most right-wing head of the Treasury since Nigel Lawson, but she has lost the opportunity to be a tough but far-sighted Iron Chancellor. Delay, drift, panic: the cartoonist for The Times was closer to the mark. She is the Tin Chancellor.