Sir Keir Starmer’s recent reversals on benefits and winter fuel payments have opened up a £4.5bn shortfall in public finances, with leading economists warning that this will likely lead to tax increases in the autumn Budget.
The Resolution Foundation has revealed that the Prime Minister’s backtrack on his proposed welfare reforms is not only broader than anticipated but also considerably more expensive.
When combined with his earlier decision to restore winter fuel payments, the total fiscal gap nears £5bn — a significant challenge awaiting Chancellor Rachel Reeves.
The Prime Minister’s latest move ensures that all current recipients of Personal Independence Payments (PIP) — the primary disability support — will retain their entitlements.
This measure alone is projected to cost £2.1bn annually by 2030. Additionally, the commitment to continue the health element of Universal Credit for 2.2 million individuals will add up to £1.1bn more each year.
Together, these pledges eliminate up to £3.2bn from the government’s planned £5bn in welfare savings.
The Institute for Fiscal Studies (IFS) echoed similar concerns, estimating that the U-turn could cost around £3bn. Their warning is clear: this severely undermines the intended savings and may force ministers into further tax increases or spending cuts.
“These changes make further tax rises in the Autumn budget, which will mainly be dependent on how economic forecasts change, even more likely,” the IFS noted. Associate director Tom Waters added that the chancellor’s balancing act has just become “that much harder.”
Last month’s reversal on winter fuel payments will cost an additional £1.3bn, covering 7 million pensioners. The cumulative effect of these decisions now places a £4.5bn burden on the Treasury.
Professor Jonathan Portes of King’s College London, also a former Cabinet Office chief economist, shared his forecast: “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.”
When pressed about how these pledges would be financed, Care Minister Stephen Kinnock declined to comment, stating that the Chancellor would detail the funding strategy in her autumn Budget.
Sir Keir’s dramatic shift came amid mounting pressure from within his own party. To stave off a rebellion, he agreed to protect PIP for all current claimants and launched a review of the assessment process, led by Disabilities Minister Sir Stephen Timms. The review will be “co-produced” with disabled individuals.
A Downing Street 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, a key rebel voice, welcomed the move, describing it as “a good deal” involving “massive changes” to protect the vulnerable and ensure disabled people have a say in future welfare reforms.
She added: “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.”
Despite the concessions, some Labour MPs remain defiant and are expected to vote against the bill. Initially, over 120 MPs had signed an amendment to scrap the proposals, posing a major threat to the government’s plans.
Campaigners have voiced fears that the U-turn may introduce a two-tier system for PIP recipients, creating disparities between those under the old and new systems.
Ruth Curtice of the Resolution Foundation told BBC Radio 4: “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 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.”
The government now faces a race against time to plug the financial gap without alienating either voters or party members.
