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 Resolution Foundation said the prime minister’s decision to protect existing claimants of disability benefits and health benefits will be far more expensive than expected.
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.
As well as a financial headache looming, the prime minister is also continuing to battle a revolt over the planned cuts, with reports rebel MPs will attempt to put down a new amendment on Monday to delay the bill.
On Saturday the Labour peer Lord Falconer, a former Lord Chancellor, told the BBC’s Today programme that Labour needed a “reset” in the wake of the welfare debacle, while veteran Labour MP Diane Abbott called some of Sir Keir’s advisers “angry and factional”.
On Friday she warned reports of the rebellion’s death “are greatly exaggerated”, despite Downing Street now being confident the watered-down reforms will pass.
Speaking for the first time about the change of course on Friday afternoon, the prime minister 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 claiming Personal Independence Payments (PIP), will stop 370,000 people 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 will wipe out up to £3.2bn of the £5bn the government had hoped to save through the changes. Institute for Fiscal Studies associate director Tom Waters said the chancellor’s already difficult Budget balancing act had been made “that much harder”.
“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.
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 he thinks tax rises are inevitable.
He said: “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.”
The National Institute of Economic and Social Research said taxes will “almost certainly” go up in the autumn.
Senior economist Ben Caswell said the U-turn will “put a dent” in how much the government was set to save, but cautioned it is “hard to see how much until we see the final bill and whether it passes”.
He added: “Will taxes go up in the autumn? Almost certainly, yes. Because, even without savings made on welfare, weak GDP growth and higher than expected borrowing mean that the chancellor has already fallen short of the £9.9bn headroom anyway.”
There is also speculation the chancellor could raise the money by freezing income tax thresholds, with Ruth Curtice, the chief executive of the Resolution Foundation, saying the “most obvious thing” would be to extend the freeze for another two years.
Care minister Stephen Kinnock was asked how the government will pay for the changes, but refused to “speculate”.
The U-turn has further diminished Sir Keir’s authority over the Labour Party, and some backbenchers have told The Independent they are keen for a reset of relations between No 10 and the parliamentary party.
The veteran Labour MP said: “Many MPs believe the cuts are wrong in principle, hurting the people we are supposed to protect. Others know how unpopular the policy will remain.” She joined several rebels in warning they will continue to oppose the changes.
Sir Keir had been facing a humiliating defeat, with more than 120 Labour MPs having signed a rebel amendment seeking to kill the welfare bill.
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 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,” she said.
“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.”
A No 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.”
As well as blowing a major hole in the government’s spending plans, campaigners warned the 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.
Ms Curtice 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.”
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