The shocking scale of the benefits cuts needed by Rachel Reeves to balance the books could see the disabled and long-term sick lose as much as £1,200 a year, a leading think tank has warned.
The analysis by the respected Institute for Fiscal Studies comes as work and pensions secretary Liz Kendall will unveil plans to slash benefits by around £5bn.
The government has already indicated that it will focus on working-age welfare claimants, particularly those claiming disability and incapacity welfare payments, with fears that the annual bill for these benefits will hit £70bn by 2030.
The concerns come as the Organisation for Economic Cooperation and Development (OECD) downgraded the UK’s already low growth forecasts in the wake of the impact of Donald Trump’s tariffs around the world.
The government insisted that its hand is not being forced into making benefits cuts to balance the books as Ms Reeves met with regulators to hear their ideas on boosting growth.
But IFS director Paul Johnson warned that Ms Reeves already had “no room for manoeuvre” in her spring statement next week, which is already being dubbed “an emergency Budget”.
According to the IFS, hitting this target will mean a potential cut of 16 per cent for claimants.
It noted: “Suppose they looked to save £5bn – a widely quoted number – from disability benefits alone by end of the parliament. To do it entirely through cutting benefit values would require a 16 per cent real-terms cut – £1,150 per year on average for the 4.3 million people expected to be on them by 2029.”
It added: “A 16 per cent cut in the value of incapacity benefits – £1,200 on average per year from 4.1 million people – would save £5bn.
“To make that saving through the caseload would require stopping it rising almost entirely. This would be a big break from post-pandemic trends (though not pre-pandemic).”
While the government indicated over the weekend that it would abandon plans to freeze personal independence payments (PIPs) following anger from within Labour, the thrust of the policy to reduce the benefits bill is being pushed ahead.
In particular, ministers are alarmed that 2.8 million adults of working age are stuck on sickness and disability benefits out of work. That number is set to increase to 4 million by 2030, costing the taxpayer £70bn a year.
Under the new plans, Ms Kendall is expected to announce more checks on sickness benefits, The Times has reported. This is likely to include a proposal to get rid of the work capability assessment at the centre of the incapacity benefit system.
She is then set to reduce the highest rate of universal credit incapacity benefit in an attempt to to end “incentives to inactivity”, although the basic rate will increase.
Ms Kendall is expected to make it harder for people with all but the most serious disabilities to claim personal independence payments (PIP), the main disability benefit. They will need to demonstrate that they have greater difficulty with such everyday activities as washing, eating and dressing.
Mr Johnson warned that the good news for Ms Reeves is that things cannot get worse.
He told Times Radio: “It’s a funny kind of good news ... in the sense that in some respects, things are so bad that hopefully they can only get better.
“So the chancellor’s got no room for manoeuvre in terms of money to spend in the spring statement or forecast or Budget or whatever we’re getting in 10 days’ time.”
He noted that the UK is spending about £20bn more on incapacity and disability benefits than it did five years ago.
He said: “We’re spending so much money on disability and incapacity benefits that surely there must be a way of getting that cut back. Our public services are so inefficient and their productivity has collapsed so much, again, surely that if they can be made to get better.”
He added: “But of course, the fiscal numbers, the Budget numbers, are based on the assumption that things basically carry on as badly as they have been. So if they can get a bit better there, maybe there’s a bit more room for manoeuvre.”
But the Centre for Social Justice (CSJ), the think tank that came up with many of the ideas for the previous major welfare reform, backed the government’s approach.
CSJ policy director Ed Davies said: “Too many people are being written off. While cutting benefits would be difficult and risk a civil war within the Labour Party, conditionality can be extended more widely through the system, particularly as sickness benefits are rolled into universal credit.
“Liz Kendall can change those who are exempt from conditionality and subject to no work-related requirements. I’m delighted to see the government adopt the CSJ’s recommendation for an ‘into work guarantee’, which will give claimants the confidence to try work at no risk to their benefits.
“We estimate that this will free 700,000 people who say they want to work to get into work, saving £10bn in benefits payments and generating £3.3bn in tax receipts, a total of £13.3bn back to the taxpayer.”
Meanwhile, Sir Keir Starmer’s government is facing a potential backlash within Labour on plans to cut disability and long-term sickness benefits. Prominent Labour peer Baroness Chakrabarti said cutting benefit payments from those with disabilities and illnesses “is not a human thing to do”. She told BBC Newsnight: “If we’re cutting benefits from people who on our own case are suffering from disabilities and illnesses, including mental illnesses, it is wrong in principle.
“It is not a Labour thing to do. It’s not even a human thing to do. It’s not a Tory thing to do, it’s not a Labour thing to do – to cut from people who are in trouble.
“And you never improved anybody’s mental health by pushing them further into poverty.”
But, ahead of a Cabinet meeting chaired by Sir Keir to sign off the plans, Pat McFadden said Labour’s front bench is united behind the changes.
“Yes I believe the Cabinet is united behind taking on the issue of the growing benefits bill,” the chancellor of the Duchy of Lancaster told Times Radio.
“The current system leaves too many people in a permanent state of dependence on benefits without the opportunity of work,” he added.
Mr McFadden cited soaring numbers of people on long-term sickness benefits, adding that people should not be “rendered permanently” unable to work.
With Donald Trump’s tariffs hitting global trade, the OECD predicted that there would be a worldwide slowing of economic growth.
The UK growth estimates fell to 1.4 per cent in 2025 and 1.2 per cent in 2026, down from already low levels of 1.7 per cent and 1.3 per cent respectively from its previous predictions.
Worldwide, the OECD said growth would slow from 3.2 per cent in 2024 to 3.1 per cent in 2025 and 3 per cent in 2026, down from 3.3 per cent previously forecast for both years, largely as a result of trade tensions sparked by the new US president.
While the UK has so far avoided harsh penalties, it has been caught by last week’s sweeping 25 per cent tariffs on steel and aluminium entering America.
In addition, the 10 per cent tariff that Mr Trump placed on Chinese imports in February doubled to 20 per cent.
Countries have been quick to retaliate and financial markets were sent reeling last week over fears the measures could spark a recession in the US.
Ms Reeves said the report shows the “world is changing, and increased global headwinds such as trade uncertainty are being felt across the board”.
The chancellor met with regulators on Monday to discuss ways of cutting red tape to boost growth in a bid to kickstart the economy.
She added: “A changing world means Britain must change too, and we are delivering a new era of stability, security and renewal, to protect working people and keep our country safe.”
The chancellor said this would mean Britain can “better respond to global uncertainty”.
But the Liberal Democrats said Labour’s economic policies are “acting as an anchor on any meaningful growth” and called for Ms Reeves to “change course”.
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