Starmer's benefits U-turn to blow £5bn hole in budget

Telegraph

26-05-2025

Sir Keir Starmer risks blowing a £5bn black hole in the public finances after U-turning on benefit cuts in the face of a backbench rebellion.
The Prime Minister will cost the Treasury as much as £1.5bn by bringing back winter fuel payments for most pensioners, while up to £3.5bn more will be lost if he axes the two-child benefit cap.
A planned reduction in net migration could cost the Treasury £7bn more, according to Britain's fiscal watchdog.
It comes as Rachel Reeves, the Chancellor, braces for another bleak set of forecasts amid speculation she will be forced to raise taxes in her autumn Budget.
Left-wing Labour MPs are clamouring for the Government to loosen the purse strings, with whips seeking to head off a potentially major rebellion.
Meanwhile Nigel Farage, the Reform leader, will this week attempt to outflank Labour on welfare by calling for winter fuel payments to be restored for all and the two-child benefit cap to go in full.
Angela Rayner, the Left-wing Deputy Prime Minister who called for tax rises in a leaked memo revealed by this newspaper, put on a show of support in TV interviews on Sunday.
Ms Rayner insisted she 'never' wanted to become prime minister and rejected speculation that the document was leaked to further her leadership ambitions.
The Deputy Prime Minister added that she was '100pc' behind Ms Reeves, and said she could not do a better job as prime minister than Sir Keir.
In her first public comments since the memo emerged, Ms Rayner said: 'I have no desire to go for the leadership of the Labour Party. My desire is to deliver for the people of this country who have given me opportunities beyond what I could have dreamed of.'
She also confirmed a formal leak inquiry is now underway to ascertain how The Telegraph was able to reveal the document, which outlined eight proposed tax increases and two benefit cuts.
Winter fuel payments
Sir Keir announced last week that more pensioners would get winter fuel payments, which are between £200 and £300, than his Government had originally planned.
There is a growing expectation in Whitehall that the specifics of that new position will come in the weeks ahead rather than at the autumn Budget, as Sir Keir first indicated.
The Treasury is planning to restore the payments, which had been stripped from nearly 10m pensioners last summer, to almost everyone in retirement except the very wealthy.
The money could then be removed from only the most well-off pensioners by clawing it back when they file a tax return, allowing Labour to still claim millionaires will not get the payments.
The changes are likely to mean far smaller savings for the Treasury than the £1.5bn that the measure was initially expected to raise. If the payment was stripped only from the million pensioners who are in the 45pc additional income tax rate bracket, for example, it would generate between £200m and £300m.
Two-child benefit cap
Additional pressure on the finances would come from scrapping the two-child benefit cap, which applies to Universal Credit.
Sir Keir initially kept the Tory policy when taking office, but The Observer reported this weekend that the Prime Minister wanted to remove it. Whitehall insiders cautioned that it has not yet been decided what – if anything – might replace the current limit.
Announcements on any changes to the cap are expected to come around the Budget, with the poverty strategy delayed from summer until then when the financial situation is clearer. Getting rid of the two-child benefit cap entirely would cost £3.5bn.
The possibility of the Treasury losing up to £5bn in annual revenue if both policies are abandoned in full would increase the need for new tax rises, spending cuts or looser borrowing rules.
Ms Reeves is already facing a difficult set of decisions with current economic forecasts suggesting she is in growing danger of breaking her fiscal rules.
Further factors
Other factors will shape how much money the Chancellor has to play with in her autumn Budget.
Home Office proposals to reduce net migration by 100,000 a year could have a knock-on impact on the Chancellor's headroom, with estimates suggesting an annual rise in borrowing of £7bn by the end of the decade.
Last week's announcement on above-inflation pay rises for the public sector could add drive spending up by £2bn to £3bn each year, creating additional pressures.
But new trade deals with America, India and the European Union are expected by the government to boost trade, which could bring much-needed additional tax revenue.
Treasury officials are also understood to be pressing the Office for Budget Responsibility (OBR), the Government's official independent forecaster, to accept that the Labour Government's housebuilding drive will boost economic growth more than previously expected.
The most unpredictable factor could well be the decisions on trade protectionism taken by Donald Trump, the US President, which have knock-on impacts on UK economic forecasts.
Mel Stride, the shadow Tory chancellor, told The Telegraph: 'Labour have already lost control of the public finances and abandoned any pretence of fiscal responsibility.
'Now they are looking at loading up billions more in welfare spending, paid for either by higher taxes for working families or through yet more borrowing.
'When added to the likely cost of their panicked climbdown on Winter Fuel Payments, the Chancellor faces a potential £5bn black hole.
'Rachel Reeves's credibility is having new holes torn in it by the day. She is the 'tin foil' Chancellor, too weak to withstand pressure including from her own colleagues.
'We've already had fantasy economics from Reform – it appears Labour are following suit.'
A No 10 insider insisted that no final decisions have been taken on the new winter fuel payment position or the future of the two-child benefit cap.