Rachel Reeves and welfare have a complicated history. In 2013 she told the Telegraph that Labour would be “tougher” than the Conservatives on benefits (such was the opprobrium that resulted that – eight years on – Reeves used an interview with the New Statesman to clarify her comments). Then last July, to broader outrage, she announced that all but the poorest pensioners would lose their winter fuel payments.
And yet, as Reeves counts the cost of anaemic economic growth, it is welfare to which she has once again turned. The Chancellor yesterday submitted billions of pounds of planned cuts to the Office for Budget Responsibility as she seeks to avoid breaching her fiscal rules.
That Reeves has alighted on welfare is no surprise. Total spending is projected by the OBR to rise from £313.6bn this year to £377.7bn (11.1 per cent of GDP) in 2029-30. Of this increase, nine-tenths is accounted for by higher spending on pensioners and health and disability benefits.
Faced with this, some commentators appeal to Reeves to end the “triple lock” on the state pension. But that’s a policy that the Chancellor – who knows the perils of taking money from the grey vote – has no intention of abandoning.
This leaves health and disability benefits. Here’s the forecast that stands out: spending in this area on working-age adults is projected to rise from £48.5bn in 2023-24 to £75.7bn in 2029-30 (a record 2.8 million people are out of work due to long-term sickness). Those close to Reeves believe this is unsustainable – not just fiscally but morally. “Whether we had [financial] headroom or no headroom, we would have to fix welfare because we’re called the Labour Party for a reason: we believe in people being in work,” says one ally.
For Labour, the politics of this choice are clear. YouGov polling shows that 53 per cent of the public believe the qualifications for receiving benefits aren’t strict enough while just 25 per cent believe they are too strict (No 10 is keenly aware that the country takes a different view of welfare to the party).
But this won’t prevent a revolt within Labour – some MPs predict the biggest rebellion of this parliament to date (one says there are plenty looking for “a hill to die on”). Welfare, they say, could be the tipping point for those already aggrieved by a succession of flinty policies: the winter fuel cuts, the non-compensation of the Waspi women and the 40 per cent reduction in the foreign aid budget.
What of the alternatives? Among Labour MPs, Germany’s “war Keynesianism” has prompted much excited discussion. But the Treasury – perhaps unsurprisingly – doesn’t see this as a model to emulate. Germany, sources note, has a national debt of just 62.9 per cent of GDP while Britain’s stands at 95.3 per cent. And Berlin’s €500bn fiscal expansion, they further point out, has already had consequences – German borrowing costs rose by the highest amount since the fall of the Berlin Wall in 1989. Reeves, who used her first Budget to rewrite her fiscal rules – prompting some market tremors – has no desire to embark on a fresh experiment at this point.
Accepting this caution, some in Labour advance a different argument: why not reverse the Tories’ cuts to National Insurance? Again – with the tone of those asked what the Romans ever did for us – Reeves’ allies point out that she has already raised taxes by some £41.5bn (to the consternation of business). Further tax rises, they add, would have implications for growth – there are no cost-free choices.
Such is the economic logic driving Reeves towards cuts. But in a changed world in which – as I wrote on Monday – the welfare state is being forced to contend with the return of the “warfare state”, the tough decisions won’t end for the Chancellor. Rather than choosing between cutting more, borrowing more and taxing more, don’t be surprised if Reeves ends up having to do all three.
This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here
[See also: The provocations of Enoch Powell]
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