Reeves insists changes to welfare needed as MPs call for flexibility

UK Chancellor Rachel Reeves has insisted that welfare spending must be "controlled," stating that the current welfare system is failing both taxpayers and beneficiaries. Reeves' comments come amid concerns from Labour MPs about the impact of expected welfare budget cuts, as the government attempts to alleviate anxieties among backbenchers.

Some Labour MPs have revealed to the BBC that potential changes to disability benefits are "unacceptable" and they "won't accept it." Work and Pensions Secretary Liz Kendall is set to unveil detailed plans next week, while the Chancellor will announce the full scale of spending cuts in the upcoming Spring Budget statement.

When asked about the proposed welfare cuts, Reeves stated, "We will have a plan for welfare reform, but it's obvious that the current system is failing everyone... and also, welfare spending is going up by billions of pounds in the coming years, and that's not good for taxpayers." Currently, welfare spending related to health and disability amounts to £65 billion per year, and is projected to increase to £100 billion over the next four years.

Labour leader Sir Keir Starmer has called the current welfare system unsustainable, untenable, and unfair, stating that the government cannot "shrug our shoulders and walk on by." However, the manner and magnitude of the spending cuts have sparked unease. Left-wing Labour MPs have called for a wealth tax instead of welfare cuts, but the Chancellor has not been amenable to this.

The left-wing group "Momentum" has released a lobbying tool to make it easy for people to contact their respective MPs, urging them to reject the proposed cuts. Some usually loyal Labour MPs have also expressed concerns about the proposed welfare reassessment and how to help those facing hardship. "Downing Street is in no doubt about the strength of feeling," said one MP. Another said: "People have to work. The public is more right-wing on this than Reform. But I know from personal experience that some people can't work because of physical and mental difficulties, so I want assurances that they will be treated with dignity and respect."

Furthermore, an increasing number of MPs in the "Make Work Pay" group believe that Labour has a moral responsibility to reform the welfare system, regardless of whether it saves money. Some are also privately advocating for greater flexibility on fiscal rules to avoid painful cuts. Reeves' own rules, designed to bring stability to the UK economy, require day-to-day government spending to be paid for by tax revenue, not borrowing; and for debt as a share of national income to be falling within five years.

The decision by Friedrich Merz, Germany's next Chancellor (a center-right politician), to exempt defense and infrastructure spending from the country's "debt brake" restrictions has prompted calls for relaxing these rules. Former International Development Secretary Annelliese Dodds called for a collective discussion on the Chancellor's fiscal rules and approach to taxation in her resignation letter. Some large unions, particularly Unite, have also voiced support for this. The internal criticism has frustrated the Treasury team.

A Treasury source emphasized the risks of such an approach, pointing out that Germany's borrowing costs have risen to a 30-year high since Merz's announcement. The Chancellor faces immense pressure ahead of the Spring Budget statement, with the UK economy teetering on the brink of stagnation. But those close to her believe that the suggestions of her critics should also be scrutinized, and are vigorously rebutting what they see as impractical solutions.

If the UK were to follow Germany's lead, Treasury officials believe it could add £4 billion to borrowing costs – equivalent to the budget of some departments – and potentially lead to higher interest rates and mortgage payments. In other words, some Labour MPs' hopes that a change in the UK's defense posture could free up more borrowing have been thoroughly dashed. Some Labour politicians (non-left) concerned about the looming welfare cuts have complained about the Treasury's lack of communication.

The doors of Number 11 Downing Street will remain closed to many of them. Government sources point out that backbenchers have been meeting with policy teams at Number 10 and ministers at the Department for Work and Pensions, where they have listened to MPs' questions and concerns. At the ministerial level, there are also concerns about the influence of the Office for Budget Responsibility (OBR), which assesses whether the government's figures add up and if there is any "headroom" in meeting fiscal rules.

One source said that the OBR has been given "god-like" status and its economic forecasts are seen as immovable. But both Number 10 and 11 are aware that any interference with the independent body would be politically toxic, reminiscent of Liz Truss, who disregarded the OBR ahead of her disastrous mini-budget. Treasury sources point out that they have already tweaked the fiscal rules – changing the definition of public debt – without incurring the OBR's wrath. This has freed up billions of pounds for investment.

Tensions within Labour are unlikely to subside unless the government makes greater progress on its central mission of achieving economic growth, which would reduce the need for tax increases and spending cuts. Although just a snapshot, data for January showed a reversal of economic growth, which is politically (if not economically) significant, allowing the opposition to push for a change of direction. Conservatives and Liberal Democrats want the Chancellor to scrap what they call the "jobs tax" – the increase in National Insurance contributions for employers due next month.

They argue that this is hindering economic growth, but the Chancellor will not change her mind. In fact, her prescription for low or zero growth is to implement already announced policies "faster and deeper." This includes further deregulation, and more quasi-autonomous bodies are set to become her target after NHS England is abolished. As Reeves' officials pore over the economic charts ahead of the Spring Budget statement, they might be able to draw up a new one. This chart would show that economic growth is inversely proportional to divisions within the Labour party.