Tax rises are increasingly likely in the autumn Budget after Labour rebels forced Sir Keir Starmer into a humiliating capitulation on the government’s welfare reforms which will now “save nothing,” say leading economists.
The Prime Minister gutted his welfare bill at the last minute by removing plans to restrict eligibility for personal independence payments in order to head off the Government’s first Commons defeat on Tuesday evening.
Changes to Pip will now be delayed until after a review of the benefit not due to conclude until autumn 2026.
Economists at the Institute for Fiscal Studies warned that Tuesday’s concessions meant that Chancellor Rachel Reeves could now expect no “net savings” by 2029/30 - a key year for meeting her fiscal targets.
Incoming IFS director Helen Miller said the benefits reforms had aimed to save £5 billion but this had been wiped out by the series of U-turns.
“By the end of this Parliament the Government will save nothing,” she told BBC radio.
She added that the welfare retreat, combined with the U-turn on winter fuel payment cuts, had dealt a blow of around £6 billion to the Government’s financial plans, nearly completely erasing the Chancellor’s “fiscal headroom” of some £9 billion ahead of her autumn Budget.
Warning that the Office for Budget Responsibility could downgrade the UK’s growth forecasts, she stressed: “Come autumn, given that the Government has been not able to put through the cuts that it wanted, and given that the growth might get worse rather than better, it’s looking increasingly likely that if the Government needs to do something they will turn to tax rises.”
Cabinet Office minister Pat McFadden admitted the welfare climbdown had a “financial” cost but stressed ministers "will keep to the tax promises" in Labour’s manifesto.
Asked explicitly whether he could rule out tax rises, he said: "I'm not going to speculate on the Budget.
“It doesn't make sense for me to speculate on something where, as I say, there are so many moving parts of which this is only one element."
Ministers have repeatedly insisted that Labour will not raise taxes on "working people", specifically income tax rates, national insurance or VAT.
But this leaves open the option of freezing the income tax thresholds.
Sir Keir will face a grilling from MPs on Wednesday as he attempts to repair relations with his backbenchers.
The weekly session of Prime Minister’s Questions comes a day after 49 of his own MPs voted against his welfare reforms - the biggest rebellion of his premiership so far - while several backbenchers described the Government’s handling of the issue as “chaotic” and “shambolic”.
The rebellion came despite the government’s decision to remove the Pip changes from the Universal Credit and Personal Independence Payment Bill - announced just 90 minutes before MPs voted on Tuesday night.
The concession followed a partial U-turn last week in the face of a possible Commons defeat for the PM.
Work and Pensions Secretary Liz Kendall insisted the Labour Party was “100%” behind the Prime Minister, but acknowledged there were “lessons to be learned” after the rebellion.
She also appeared to express regret over the handling of the issue, saying: “I wish we had got to this point in a different way.”
The decision to remove key parts of the Bill is remarkable for a Government with a working majority of 165 and after just under a year in office.
Tory leader Kemi Badenoch accused ministers of “utter capitulation” and said the legislation was now “pointless”.
To see off the threat of rebellion, the Government last week softened the impact of its changes to protect some 370,000 existing Pip claimants who had been set to lose out following reassessment.
Reacting to the vote, mayor of London Sir Sadiq Khan said: “I’m pleased that the Government has started to listen and take on board what disability groups, campaigners and others have been saying about the damaging impact of this bill.”
