Chancellor Rachel Reeves’ plan to reduce welfare costs through reforms has been largely unsuccessful.
Despite making concessions on the benefits bill, the projected savings of £5bn by 2029-30 have been significantly reduced.
With the government’s £10bn buffer now depleted due to the reversal of the Winter Fuel Allowance, Reeves is left with five potential solutions to address the financial situation before the Autumn Budget.
One possibility is to wait and see if the UK economy grows more than expected and debt interest costs decrease, but this is a risky move.
The decision to announce welfare reforms in March was driven by higher debt interest payments and weaker tax receipts, which had already depleted the government’s buffer.
Additionally, the Office for Budget Responsibility, an independent body that evaluates the government’s spending plans, has reduced its forecast for UK economic growth this year to 1%.
At the time of the welfare reform announcement, there was also uncertainty surrounding the impact of US tariffs imposed by President Donald Trump.
However, the UK has since reached a deal with the US, resulting in reduced tariffs for some industries, although a 10% tax still applies in certain areas and a final agreement on UK steel shipments has yet to be reached.
Reeves recently announced a Spending Review, with the NHS and defense receiving significant funding increases while other departments faced cuts.
Asking ministers to find additional savings after just receiving their budgets would not only cause disruption, but also make the government appear to be scrambling to regain credibility.
There are also doubts about whether the government can afford to remove the two-child benefit cap, which would cost an estimated £3.5bn according to Shadow Chancellor Sir Keir Starmer.
Reeves has set two financial rules since becoming chancellor: day-to-day spending must be covered by government revenue, and debt must decrease as a percentage of national income within a five-year period.
She has emphasized that these rules are non-negotiable and are meant to demonstrate the UK’s financial stability after former Prime Minister Liz Truss’s mini-budget in 2022 caused concerns.
While Reeves could potentially change these self-imposed rules, it could have negative effects on the financial market and lead to increased debt interest payments.
The Office for Budget Responsibility produces two assessments of the UK’s economic and financial outlook each year, coinciding with the Autumn Budget and the Spring Statement.
The International Monetary Fund has suggested limiting the OBR report to just once a year, arguing that this would promote policy stability and reduce pressure on the government’s buffer figure.
Prior to the mini-budget, Truss and her Chancellor Kwasi Kwarteng disregarded the OBR when announcing £45bn in unfunded tax cuts, causing concern in the financial market.
In response, Reeves introduced a new law requiring any government announcement that significantly impacts taxes or spending to be assessed by the OBR.
To limit the OBR report to once a year, Reeves could choose to only provide an update on the state of the economy in the Spring Statement.
Labour has promised not to raise taxes for working people, ruling out increases to employee National Insurance Contributions, Income Tax, and VAT.
However, cabinet minister Pat McFadden has acknowledged that there will be financial consequences to the decision to reduce planned welfare cuts.
This leaves Reeves with few options to replenish the government’s funds.
One possibility is to extend the freeze on tax thresholds, which was introduced by the Tory government and was set to end in April 2028.
This could bring in nearly £7bn, but would essentially be a tax increase for working people as any pay increase could push individuals into a higher tax threshold.