Brits are on high alert for tax hikes today after Keir Starmer caved into a massive Labour revolt on welfare.
The PM has handed major concessions to rebels in a desperate bid to salvage flagship legislation on health and disability benefits.
More than 120 MPs had vowed to kill the plans in a crunch vote on Tuesday. But after frantic negotiations – with Sir Keir personally lobbying backbenchers – a late-night deal was announced, including guarantees that existing claimants will not lose money.
The move looks like it could be enough to prevent a disastrous defeat for the government at second reading, although some critics are still vowing to oppose the measures.
However, the change on Personal Independence Payment (Pip) is estimated to wipe up to £2billion off the £5billion savings by the end of the Parliament, and Universal Credit tweaks another £1billion.
Rachel Reeves was already struggling to balance the books with the economy stalling and the previous £1.25billion U-turn on winter fuel allowance.
Ruth Curtice of the Resolution Foundation think-tank suggested the warned she will not be able to find the money in existing budgets.
‘That leaves only extra borrowing – which the Chancellor doesn’t have much space for unless she were to change her own fiscal rules – or tax rises,’ she told BBC Radio 4’s Today programme.
Asked if that effectively meant there would be tax rises, Ms Curtice said: ‘Yeah. Unless the government were to get better news on the economy the next time the OBR does a forecast… but when we look at everything that’s happened in the world since they last did that in March our estimate is that they will actually get bad news from the OBR as well.’
Sir Keir and Ms Reeves have both insisted that Labour will stick to the manifesto pledge not to increase income tax, VAT or workers’ national insurance.
The Chancellor has also been adamant that she will not ease her fiscal rules, after borrowing more at the last Budget to splurge on the NHS, public sector pay and infrastructure.
But Downing Street did appear to hint at the possibility of a temporary loosening today. Grilled on how the step would be funded, a spokesman said: ‘There’ll be no permanent increase in borrowing, as is standard.
‘We’ll set out how this will be funded at the budget, alongside a full economic and fiscal forecast in the autumn, in the usual way.’
Asked whether the Government could say there would be no tax rises to pay for the changes, the spokesman said: ‘As ever, as is a long-standing principle, tax decisions are set out at fiscal events.’
Challenged how the costs would be covered, health minister Stephen Kinnock told Times Radio: ‘The full details around what we are laying out, what I’ve summarised really today, is going to be laid out in Parliament, and then the Chancellor will set out the budget in the autumn the whole of the fiscal position and this will be an important part of that.
‘But forgive me, I’m not in a position to set those figures out now.
‘I think that is very much the Chancellor’s job as we move into the budget in the autumn.’
Work and Pensions Secretary Liz Kendall said she believed Labour was in ‘a good place now’ on the welfare Bill.
She told broadcasters: ‘We have listened to people, we have engaged with them.
‘I think we’re in a good place now, alongside the huge investments we are putting in to create the jobs that people need in every part of the country, to get waiting lists down in the NHS, to ensure stronger rights at work, but also to make sure there’s employment support for those who can work and protections for those who can’t.’
Asked whether the Government had created a disparity between existing and new claimants, she insisted it was ‘very common in the welfare system that there are protections for existing claimants’.
‘That’s happened before,’ she said.
Unveiling the concessions overnight, a No10 spokeswoman said: ‘We have listened to MPs who support the principle of reform but are worried about the pace of change for those already supported by the system.
‘This package will preserve the social security system for those who need it by putting it on a sustainable footing, provide dignity for those unable to work, supports those who can and reduce anxiety for those currently in the system.
‘Our reforms are underpinned by Labour values and our determination to deliver the change the country voted for last year.’
The Government’s original package restricted eligibility for the personal independence payment (Pip), the main disability payment in England, and limited the sickness-related element of universal credit.
Existing claimants were to be given a 13-week phase-out period of financial support in an earlier move that was seen as a bid to head off opposition by aiming to soften the impact of the changes.
In her letter, the Work and Pensions Secretary said: ‘We recognise the proposed changes have been a source of uncertainty and anxiety.
‘We will ensure that all of those currently receiving PIP will stay within the current system. The new eligibility requirements will be implemented from November 2026 for new claims only.
‘Secondly, we will adjust the pathway of Universal Credit payment rates to make sure all existing recipients of the UC health element – and any new claimant meeting the severe conditions criteria – have their incomes fully protected in real terms.’
She said a ministerial review would ensure the benefit is ‘fair and fit for the future’ and will be a ‘coproduction’ with disabled people, organisations which represent them and MPs.
‘These important reforms are rooted in Labour values, and we want to get them right,’ she said.
The change in Pip payments would protect some 370,000 existing claimants who were expected to lose out following reassessment.
Tom Waters, an Associate Director at IFS, said: ‘These changes more than halve the saving of the package of reforms as a whole, making the Chancellor’s already difficult Budget balancing act that much harder.
‘The decision is to protect existing health-related benefit claimants from the reforms, thereby making the savings entirely from new claimants to these benefits.
‘This will create big differences – thousands of pounds a year, for many years in some cases – between similar people with similar health conditions who happen to have applied at a slightly different time.’
If the legislation clears its first hurdle on Tuesday, it will then face a few hours’ examination by all MPs the following week – rather than days or weeks in front of a committee tasked with looking at the Bill.
The so-called ‘reasoned amendment’ tabled by Treasury select committee chairwoman Dame Meg Hillier had argued that disabled people have not been properly consulted and further scrutiny of the changes is needed.
She said: ‘This is a good deal. It is massive changes to ensure the most vulnerable people are protected… and, crucially, involving disabled people themselves in the design of future benefit changes.’
While the concessions look set to reassure some of those who had been leading the rebellion, other MPs remained opposed before the announcement.
