Sir Keir Starmer’s U-turns on benefit cuts and winter fuel payments have blown a £4.5bn hole in the public finances that will ‘very likely’ be filled by tax rises in the autumn Budget, leading economists have warned.
The prime minister’s climbdown over his welfare bill is even bigger, and far more expensive, than expected, Resolution Foundation analysis found.
And, combined with last month’s U-turn on winter fuel payments, Sir Keir will now need to find almost £5bn ahead of his chancellor Rachel Reeves’ autumn Budget.
Amid heavy criticism of the change of course, the prime minister said his reforms now “strike the right balance”. Speaking for the first time since making the U-turn, Sir Keir said: “The most important thing is that we can make the reform we need.
“We talked to colleagues, who’ve made powerful representations, as a result of which we’ve got a package which I think will work, we can get it right.
“For me, getting that package adjusted in that way is the right thing to do, it means it’s the right balance, it’s common sense that we can now get on with it.”
The Resolution Foundation said the change to Sir Keir’s welfare bill, which will protect all those currently receiving personal independence payments (Pip), the main disability payment, will prevent 370,000 from losing the support.
That will cost £2.1bn per year by 2030, while protecting the income of all those receiving the health element of universal credit, affecting 2.2 million people, will cost up to a further £1.1bn each year.
It wipes out up to £3.2bn of the £5bn the government had hoped to save through the changes. The Institute for Fiscal Studies (IFS) also warned the latest U-turn would cost around £3bn, wiping out more than half the savings of the welfare package, which wold have to be funded by tax hikes or spending cuts elsewhere.
“These changes make further tax rises in the Autumn budget, which will mainly be dependent on how economic forecasts change, even more likely,” its analysis warned. IFS associate director Tom Waters said the chancellor’s already difficult Budget balancing act had been made “that much harder”.
And, on top of the £1.3bn decision to reinstate winter fuel payments for 7 million pensioners, Sir Keir’s month of U-turns has left him grappling with the £4.5bn black hole in the public finances.
Jonathan Portes, an economics professor at King’s College London and the former chief economist at the Cabinet Office, told The Independent that he thinks tax rises are coming down the track.
He said: “I thought that was very likely anyway. I think that the benefits stuff just reinforces the basic point that demographics and public demand for better public services mean that somewhat higher taxes are required and it is long past time politicians were honest about that.”
Danni Hewson, head of financial analysis at investment platform AJ Bell, warned that “the Treasury’s sums no longer add up” and “more unpleasant choices may have to be made this autumn”.
She said: “If growth can’t conjure a magic money tree, tax rises could well be the next difficult and unpopular decision Rachel Reeves has to make if she wants to continue to meet her own fiscal rules.”
Care minister Stephen Kinnock was asked how the government will pay for the changes, but refused to “speculate”. He said the chancellor would confirm how the U-turns will be funded when she delivers her Budget in the autumn.
As well as making tax rises in the autumn a near certainty, the U-turn further diminished Sir Keir’s authority over the Labour Party. In a damning assessment of the PM, a senior Labour source took aim at his top team, adding to criticism in recent days of his chief of staff Morgan McSweeney.
It followed days of briefing against Sir Keir’s right hand man from MPs who believe the PM has spent too much time with his Downing Street advisers and not enough time in parliament listening to their concerns.
The source said: “The delusion is shattered. Morgan’s strategy is to polarise — in the belief that people will hold their nose and vote Labour for fear of reform. That won’t happen — too many people already did that in 2024.
“It’s like they don’t care if they lose the next election — Starmer will be off to a job at NATO, Reeves off to a fat corporate pay check… the country wants Labour to be authentically Labour.”
Amid growing talk in Labour circles of whether the PM will be able to hold onto his position until the next general election, MPs told The Independent that a poor local election performance next year, on top of the repeated U-turns and Labour’s disastrous showing in May, would see Sir Keir forced to step down. MPs increasingly want a reset of relations between the prime minister and the parliamentary Labour Party and an end to the disregard they feel they have been shown through his first year in charge.
Work and pensions secretary Liz Kendall sought to downplay party splits over the legislation, insisting Labour is in “a good place now” after the changes. “We have listened to people, we have engaged with them… we are in the right place with the changes we’ve made ,” she said.
But Tory leader Kemi Badenoch said Sir Keir had left the country with “the worst of all worlds” after the U-turn.
“I think we’re seeing a government that is floundering, a government that is no longer in control despite having a huge majority,” she said.
She added: “I don’t see how they’re going to be able to deliver any of the things they promised if they can’t do something as basic as reducing an increase in spending.
“It’s a real shame because what they’re doing now with this U-turn is creating a two-tier system … this is the worst of all worlds.”
It comes after Sir Keir made major concessions to Labour MPs plotting to thwart his controversial welfare bill.
In a late night climbdown, the PM offered to protect Pip for all existing claimants and promised a review of the Pip assessment to be led by disabilities minister Sir Stephen Timms and “co-produced” with disabled people.
A Number 10 spokesperson 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, support those who can and reduce anxiety for those currently in the system.”
Dame Meg Hillier, one of the leading rebel voices, described the concessions as “a good deal” involving “massive changes” to protect vulnerable people and involve disabled people in the design of future reforms.
She said: “It’s encouraging that we have reached what I believe is a workable compromise that will protect disabled people and support people back into work while ensuring the welfare system can be meaningfully reformed.”
Some Labour rebels are sticking to their guns and will still vote against the bill on Tuesday, but it is likely now to have enough support to pass the Commons. He had been facing a humiliating defeat, with more than 120 Labour MPs having signed a rebel amendment seeking to kill the bill.
As well as blowing a major hole in the government’s spending plans, campaigners warned the chaotic U-turn sets up a two-tier system for Pip claimants, where those on the new system face different criteria to those already receiving payments.
Ruth Curtice, chief executive of the Resolution Foundation think tank, told BBC Radio 4’s Today programme: “It’s certainly the case you will have two recipients with the same scores on Pip assessments, one will be eligible and one won’t be under this system for a period of years.
“On the other hand, it is not unusual to introduce changes to the disability benefits system this way, where there are some more protections for existing recipients and that is not just a political question, I think it is also the case that losing substantial amounts of money can have a bigger impact on families.”
James Watson-O’Neill, chief executive of the national disability charity Sense, said:”The concessions announced by the government on the upcoming welfare bill are significant and positive, yet fall short of a fair deal for disabled people.”
