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Speculation around potential tax rises in the coming UK Budget has gone into overdrive. The latest reports suggest Chancellor Rachel Reeves may be considering everything from an exit tax on wealthy people fleeing the country to a raid on high-value properties. Revenue-raising measures will be needed at the fiscal event on November 26 to plug what could now be a £30bn hole in the public finances. But the swirl of rumours about higher levies is all the more unsettling for taxpayers and investors because much less has been announced on how the Labour government plans to restrain spending, and in turn reduce the need for future tax rises.
One of the biggest tests lies in tackling welfare spending, particularly outlays on ill health and disability. Although Britain’s non-pensioner benefit spending is forecast to remain just above 4.5 per cent of GDP in the medium term, a rising share is expected to go towards personal independence payments. These support individuals with health conditions or disabilities regardless of their employment status, and are set to rise by over £12bn by 2030. An ageing population and higher sickness plays a part, but so do flaws in how they are administered.
The government’s welfare bill aimed to tighten the eligibility criteria for PIPs, but a backbench rebellion forced a U-turn in the summer, wiping out around £5bn in potential savings. The episode should not be an excuse to slow reform. Last week, the government launched the year-long Timms Review into the health benefits. It should be ambitious in identifying savings. This includes ensuring that entitlements are more accurately graded according to the additional costs individuals face due to their illness, particularly for mental health issues, which have soared since the pandemic.
Broader reforms to working-age benefits are also necessary. Decades of fiddling by consecutive governments have left behind an inefficient system which acts as much as a trap as it does a safety net. Labour should fix payment structures that can discourage recipients from entering work, incentivise claims, and leave others without adequate support. Fixing the system will require money to fund more frequent reassessments of entitlements and boost support for individuals to find and stay in work. But, done well, such changes could save the government billions in the long run.
The are other avenues to save on welfare spending too. According to the Office for Budget Responsibility, the “triple lock”, which ties the annual state pension increase to the highest of average earnings growth, inflation or 2.5 per cent, now costs the government about £12bn more per year than if it were, more sensibly, linked only to earnings since 2011. Faster progress on the government’s broader efforts to improve healthcare, build more affordable housing, and invest in young people would also ease strains on the state safety net.
But getting to grips with welfare spending is not just about balancing the books. It is also a political imperative too. Nigel Farage, leader of Reform UK — which is ahead in the polls — refocused his party on spending cuts in a speech on Monday. For the first time in a decade the majority of British adults believe the generosity of the welfare system stops people from supporting themselves, according to the National Centre for Social Research.
Welfare reform will not be easy or pain-free, but it has become unavoidable. Major changes may be unrealistic for this Budget, but Labour can at least demonstrate serious intent. Without that signal, it will be forced into ever more damaging tax rises — and risk losing what credibility it still holds with both markets, and voters.