Rachel Reeves is facing a pivotal moment in the run up to next month’s Spending Review. With mounting pressure from within her own party and a shifting political landscape, the Chancellor is being urged to reverse two controversial welfare policies: the two-child benefit cap and cuts to winter fuel payments. But can she do so without breaching her self-imposed fiscal rules?
The two-child benefit cap, introduced by the Conservatives in 2017, restricts child-related benefits to the first two children in a family. Critics argue the measure has deepened child poverty, with recent figures showing 4.5 million children living in relative low-income households. Keir Starmer has reportedly instructed the Treasury to explore scrapping the cap, a move that would cost an estimated £3.5 billion annually.
The Government has already announced a U-turn on Winter Fuel Payment cuts, restoring support for pensioners at a cost of £1.5 billion. These decisions, while popular among voters and many Labour MPs, come at a time when Reeves’s commitment to maintaining fiscal discipline is under intense scrutiny.
Reeves has pledged to adhere to strict fiscal rules: balancing day-to-day spending with tax revenues and reducing debt as a share of GDP. These commitments are central to the Government’s economic credibility. However, with the UK economy showing unexpected signs of growth, there may be some additional fiscal headroom.
Former Treasury minister Jim O’Neill has cautioned against using this headroom for welfare U-turns, instead advocating investment in infrastructure projects with higher economic returns. Yet, the political calculus is shifting. With Nigel Farage’s Reform UK pledging to scrap the benefit cap and restore winter fuel payments, Labour risks being outflanked on welfare by the populist right.
The challenge for Reeves is to balance compassion with caution. She may seek to phase in changes gradually or offset costs through targeted tax reforms. Alternatively, she could reframe these policies as investments in social stability and reducing long-term economic inactivity.
Whether Reeves can deliver these reforms without breaching her fiscal rules depends on the broader economic outlook and her ability to find credible offsets. What’s clear is that the pressure to act is growing – and so is the scrutiny of how the Treasury will pay for it.
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