Rachel Reeves to slash welfare spending

Welfare’s off to the chopping block.

Rachel Reeves plans massive cuts to welfare budget as fiscal legroom vanishes.

Following her budget announcement in October, the Office for Budget Responsibility (OBR) forecast that the Chancellor of the Exchequer had an additional £9.9 billion to spend in accordance with Labour’s fiscal rules.

This has since been depleted in the midst of increased borrowing and higher contributions to Ukraine, not least as tariffs imposed by the Trump Administration begin to affect the UK economy indirectly.

To avoid further tax increases, such as the rise to Employer’s National Insurance set to come into effect in April, Reeves has earmarked billions of pounds worth of welfare cuts which she will put to the OBR on the 5th March. This is in line with Labour’s fiscal rules to reduce debt as a share of the economy by the end of parliament, yet also their manifesto plans to reform welfare so that there are fewer incentives to “game the system” as some ministers have described.

There is little doubt that opposition will emerge over the potential risk to vulnerable economic demographics.

Over the years, government spending on welfare and pensions has ramped up. Much of this can be attributed to the hangover from the Covid pandemic, where intervention such as jobs furlough was required to maintain the economy. Since then, however, benefits spending such as sickness payments have failed to return to pre-covid levels. In 2024 there was a 25% increase in spending in this regard compared to 2019. The combination of disruption to healthcare and mental aid services as well as rapidly changing work patterns meant that around 2.5 million working-age adults (16-64) were economically inactive in the Summer of 2022. Despite the pandemic having passed, approximately an additional 652,000 have remained economically inactive (resolutionfoundation) in late 2024 compared to pre-pandemic levels. This represents a permanent extra burden on the welfare budget, exacerbated by the loss in tax revenue.

Rachel Reeves intends to compensate for the growing budgetary hole not only through slashing spending but also by modifying the system in which benefits are distributed and justified. Under her Conservative predecessors, sanctions were introduced to Universal Credit (UC) claimants who failed to provide proof they had applied for jobs. If criteria had not been met, claimants were subject to reductions in payments, depending on the severity of work evasion. Those on sickness benefits, however, are able to claim more than their UC counterparts and are not intensely incentivised to seek work. Difficulties lie in the assessment of certain conditions, most of all mental illness, in deducing the eligibility for someone to work or receive the dole.

With health and disability welfare spending set to rise year-on-year, soaring to a forecasted £100bn by 2030 (OBR), Reeves has made it one of her priority missions not only to “fix welfare to get people back to work” but also to “make the NHS more productive”. She plans to encourage transition from sickness benefits to employment, in tandem with proposed cuts.

However, these proposals are already facing backlash. Steve Wright of the Fire Brigades Union has responded, saying that any welfare cuts “would be an outrageous attack on the poorest and most vulnerable”. Alongside the Unions, economic watchdogs have also expressed criticism. Tom Pollard at the New Economics Foundation has argued that cuts “don’t really lead to increased employment”, believing that they only cause “people having not enough to make ends meet”. Watchdogs are concerned that the plans will undermine trust in the government and agitate poverty.

Reeves may face the stoutest opposition from within her own party, however. A vote on lifting the two-child benefit cap (where payments no longer increase if the household has more than two children) back in July 2024 was met with rebellion. Seven labour MPs voted in defiance of the Whip (party police on how members vote) and were suspended from the party for six months. Further welfare cuts may pose a contentious issue to those on the left of Labour, provoking potential internal conflict.

Still, Reeves has allies close by. When questioned about the welfare proposals on BBC Radio 4, Justice Secretary Shabana Mahmood defended Reeve’s justifications. She cited the “huge rise in the welfare budget”, owed to the absence of “too many young people not in work, education or training”. She presented the “moral case” for “making sure that people who can work are able to work”, whilst reinforcing the practical reality that the current situation of welfare spending “is unsustainable”.

The Chancellor of the Exchequer has a multifaceted challenge on her hands. Pressure will derive from the less than optimistic growth and borrowing forecasts, particularly as inflation has spiked since Summer last year (For more, see “Back on the rise”). Resistance in her party may be overcome, yet beyond will lie a deeper, long-term problem - ensuring that there are available and good-quality jobs awaiting those who transition from welfare.

Nevertheless, Reeve’s foremost mission is to balance the books. In doing this, her latest announcements are a predicate that benefits will be first to the fiscal chopping block if excessive tax hikes are to be avoided.