Chancellor of the Exchequer Rachel Reeves said she will reform the UK’s welfare system as part of a government drive to find savings that help plug a hole in the public finances.
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(Bloomberg) — Chancellor of the Exchequer Rachel Reeves said she will reform the UK’s welfare system as part of a government drive to find savings that help plug a hole in the public finances.
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“We’ve got to reform our welfare system, because at the moment it’s letting down taxpayers because it’s costing too much,” Reeves said in an interview with Sky News’s Electoral Dysfunction podcast, according to an emailed transcript.
Reeves is looking at cuts to the welfare budget as she tries to make the sums add up ahead of her spring statement on March 26. Initial forecasts from the Office for Budget Responsibility showed that she’s on course to miss her key fiscal rule — which requires day-to-day spending to be covered by tax receipts — due to downgraded growth forecasts and a hike in borrowing costs. Hence, she’s having to scale back her spending plans.
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The chancellor had just £9.9 billion ($12.8 billion) of headroom against that benchmark in her budget in October. While acknowledging that since then there’s been an increase in borrowing costs that will have eroded that margin, she stressed that she is “really clear that we’re going to continue to meet our fiscal rules.”
Nevertheless, she made clear that even without the pressures on the UK’s public finances, the Labour administration would have pushed forward with reforms to the country’s welfare system. “We don’t need Office for Budget Responsibility forecasts to tell us that we’ve got to reform our welfare system,” she said. “It’s letting down the people who are recipients of benefits because they are trapped on benefits rather than actively supported back into work.”
Reeves is also having to manage the pressure of a growing demand for investment in defense, following the British government’s commitment to raise military spending to 2.5% of economic output by 2027, from about 2.3% currently — a move it’s funding by cutting foreign aid.
“We recognize that the world has changed the enormity of the situation,” Reeves said. “We want to help shape that change, and we want to get ahead of the curve so that we can fulfill our obligations and keep our country safe.”
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As part of the defense push, Reeves this week confirmed that the Treasury is broadening the remit of the National Wealth Fund to allow it to invest in the defense sector, a move that may come at the cost of funding for infrastructure or clean energy projects.
Reeves’ inaugural budget increased a key payroll tax for companies, a move that has been criticized for harming job creation and business confidence. Ahead of the March 26 statement, Reeves has said her fiscal rules are “non-negotiable” and her preference is to avoid raising taxes further.
“I don’t think it is the right thing to do to increase income tax, National Insurance or VAT on working people,” Reeves said. “We made that commitment in our manifesto less than a year ago that we weren’t going to increase those taxes on working people. We’re not going to renege on that commitment.”
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