Sir Keir Starmer has told anxious Labour MPs that it is right to slash billions of pounds from the welfare bill, amid warnings that the cuts could pose the biggest threat to his authority since becoming prime minister.
Labour officials say the government is looking to cut some £5bn from the cost of the Personal Independence Payment (PIP) — the main disability benefit — as chancellor Rachel Reeves attempts to fix a hole in the public finances and get more people into work.
The prime minister told a packed meeting of MPs on Monday that a broken welfare system with the wrong incentives had created “a wasted generation”, with one-in-eight young people not in education, employment or training.
“I am not afraid to take the big decisions,” Starmer said, warning that without action the taxpayer would be spending £70bn a year by 2030 on working age sickness and disability benefits.
Ministers are expected to publish a welfare reform green paper next week. Starmer’s party was already in a restive mood about the proposed cuts when he met Labour MPs and peers to defend the strategy.
One Labour MP said: “There’s no doubt that this issue is the biggest challenge to Keir’s authority we’ve seen so far, it goes right to the core of people’s beliefs.”
Labour figures confirmed that ministers were planning a £5bn cut to PIP, which is meant to help with the extra costs of living with a long-term health condition or disability. ITV News first reported the plans.
Louise Murphy, senior economist at the Resolution Foundation think-tank, said the current cost of PIP, which is claimed by 3.6mn people in England and Wales, was about £25bn, with projections it would rise to £41bn by 2029-30.
If the government sought to make an annual saving of £5bn by 2029-30 by imposing far tougher eligibility tests for new claimants, that would imply cutting out 40 per cent of people who currently qualifies, Murphy said.
Ministers believe that the PIP system was never intended to pay for so many people with mental health conditions — Murphy says they account for about 40 per cent of new claims.
Savings could also be achieved by introducing means-testing for the benefit, so it was only paid to people also receiving health-related benefits through universal credit.
Paul Johnson, director of the Institute for Fiscal Studies, said another proposed cut — freezing PIP payments next year so they do not rise with inflation — could save a further £1bn, but this would also be unpopular with Labour MPs.
Welfare experts say the relative generosity of health-related benefits is a tacit acknowledgment that it is near-impossible to live long-term on the basic rate of universal credit.
But big cuts to welfare spending have become inevitable because of the worsening fiscal outlook facing Reeves ahead of her Spring Statement on March 26, coupled with growing demands to spend more on defence.
Ahead of a meeting of the Parliamentary Labour party on Monday, Rachael Maskell, a former shadow minister, said the planned cuts were creating “deep, deep concern” among her fellow Labour MPs.
One MP said: “Some people are feeling very mutinous and it’s not the usual suspects. A lot of people are finding it very hard to stomach cuts to the welfare bill that out-Tory the Tories.”
One minister confirmed that Starmer had been tackled on welfare cuts by multiple Labour MPs but that many were holding their fire until they saw the final package of reforms.
The minister added: “Many people think this is a Labour thing to do. The clue is in the name: we are a party of work.”
Starmer is backed by some 35 Labour MPs who have formed a new “Get Britain Working” group, which claimed that the current welfare system “often acts as a barrier against finding work”.
For Reeves, stopping the expansion in disability benefits has become a necessity. Slower growth and higher borrowing costs are expected to have wiped out the £9.9bn wriggle room she had in October against her self-imposed fiscal rules, which require her to have the current budget in surplus by 2029-30.
While Reeves has signalled she does not want to lift taxes in the Spring Statement, some analysts expect her to be forced into tax rises later this year. One option would be to extend freezes on personal tax thresholds for another two years, raising £10bn in 2029-30.