Rachel Reeves is reportedly gearing up to make further cuts to the welfare system after the UK’s budget watchdog warned the reforms would save over £1bn less than forecast.
The government said the sweeping cuts to welfare announced last week would save £5bn for the Treasury, but the Office for Budget Responsibility (OBR) is said to have rejected the estimate, instead putting the savings at just £3.4bn.
The row will leave a gaping hole in Treasury coffers, which the chancellor will need to fill if she is to stick to her rule of meeting day-to-day spending through tax receipts, rather than extra borrowing.
According to The Times, Ms Reeves is gearing up to make further welfare cuts – amounting to about £500 million - to help balance the books.
It comes just days after work and pensions secretary Liz Kendall unveiled a swathe of cuts to the welfare bill - including a tightening of eligibility for the main disability benefit personal independence payment (PIP) and cuts to the health element of universal credit (UC) - which are largely expected to hit disabled people.
But with mounting unease among Labour MPs about the scale of the cuts, Ms Reeves is not expected to try and make up the entirety of the £1.6bn shortfall through welfare, instead relying on other public spending cuts.
In the fresh round of welfare savings expected on Wednesday, the chancellor will reportedly freeze universal credit incapacity benefits for new claimants until 2030, instead of allowing it to rise in line with inflation, as well as making a small reduction in the basic rate of universal credit in 2029, after it was increased by £7 a week.
Asked about the shortfall Cabinet minister John Healey told Times Radio: “That’s a calculation we may see confirmed by the Office for Budget Responsibility about the longer-term savings that our plans to change the welfare system may bring.”
“You can’t have a benefits system that is failing people and out of control in this way”, he added.
The extra savings are expected to come despite a group of public health experts, writing in the British Medical Journal, warning people will die as a result of last week’s benefit cuts.
“Implementing yet more cuts will therefore result in more premature deaths. It is vital that the UK government understands this evidence and takes a different policy approach”, Professor Gerry McCartney, from the University of Glasgow, said.
In total, the chancellor is seeking around £15bn in savings at the spring statement in order to meet her fiscal rules.
Ms Reeves is set to acknowledge she needs to go “further and faster to kickstart growth”, amid dour predictions about her cost-cutting measures and as she scrambles for savings to help balance the nation’s books without hiking taxes.
One of the chancellor’s first acts in government was to strengthen the role of the OBR and ensure all major tax and spending policies are subject to an assessment by the watchdog.
The OBR is widely expected to slash its forecast for economic growth, following similar recent revisions by the Bank of England and the Organisation for Economic Co-operation and Development (OECD).
Lower-than-expected growth will lead to smaller tax receipts than had previously been budgeted for.
The government has also borrowed more than previously expected, with the cost of those loans rising – in part due to global turbulence.
In her spring statement, the chancellor will tell MPs that a “more insecure world” requires a greater focus on national security, with a promise to increase defence spending by £2.2bn from April as part of the previously announced plan for the biggest boost in military funding since the Cold War.
She will say: “This moment demands an active government stepping up to secure Britain’s future. A government on the side of working people.
“To grasp the opportunities that we now have and help Britain reach its full potential, we need to go further and faster to kickstart growth, protect national security and make people better off through our plan for change.”
Ms Reeves will also tell MPs she is proud of her record in office – despite the sluggish economic growth figures which have heaped pressure on her.
In its October forecast, the OBR expected GDP to grow by 2 per cent in 2025 and 1.8 per cent in 2026 but that is widely expected to be downgraded.
The Bank of England halved its growth forecast for the UK economy in 2025 to 0.7 per cent in February, and earlier this month the OECD cut its 2025 forecast from 1.7 per cent to 1.4 per cent.
Meanwhile, the latest official borrowing figures, for February, were £4.2bn higher than had been forecast by the OBR.
Ms Reeves’ self-imposed rule to meet day-to-day spending at the end of the five-year forecast through receipts rather than borrowing was forecast to be met with £9.9 billion of headroom to spare in the OBR’s October assessment.
But the lack of growth and the increased cost of borrowing will eat into that headroom, forcing the chancellor to take action to ensure she continues to meet the rule – which is designed to show that Labour can be trusted with the public finances.
The Treasury has been contacted for comment.
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