Reeves insists changes to welfare needed as MPs call for flexibility

Rachel Reeves has insisted on the need to “get a grip” on the welfare bill, saying the system is not working for the taxpayer or recipients.

The chancellor’s comments come amid concerns from Labour MPs about the impact of expected cuts to the welfare budget, as the government attempts to ease worries among backbench MPs.

Some MPs have told the BBC that potential changes to payments for disabled people would be “unacceptable” and they “wouldn’t wear it”.

The detail of the plans will be unveiled next week by Work and Pensions Secretary Liz Kendall, and the full scale of spending reductions unveiled by the chancellor the week after in the Spring Statement.

Asked about proposed welfare cuts, Reeves said: ‘We will set out our plans for welfare reform, but it is absolutely clear that the current system is not working for anyone…and it’s not working for the taxpayer when the bill for welfare is going up by billions of pounds in the next few years.”

The health and disability-related benefits bill is currently £65bn a year and projected to increase to £100bn over the next four years.

Sir Keir Starmer has called the current benefits system unsustainable, indefensible and unfair, and said the government could not “shrug its shoulders and look away”.

But how the cuts are made and how far they go has created unease.

MPs on the left of the party have called for wealth taxes rather than welfare cuts, but that is a non-starter with the chancellor.

And the left-wing group Momentum have published a lobbying tool to make it easier for people to contact their MPs, urging them to reject the planned reductions.

Some usually loyal, Labour MPs have been expressing worries about proposals for reassessments for benefits, and helping those who face difficult circumstances.

“Downing Street have been left in doubt about the strength of feeling,” one said.

Another MP said: “People have to work. The public are to the right of Reform on this.

“But I know from personal experience some people can’t work, with physical and mental difficulties so I want guarantees they will be treated with dignity and respect.”

There are also MPs among the growing Get Britain Working Group that says Labour has a moral responsibility to reform welfare, irrespective of whether it saves money.

And there are some who have been privately advocating more flexibility on her fiscal rules to stave off painful cuts.

Reeves’s self-imposed rules, which she has argued will bring stability to the UK economy, require day-to-day government costs to be paid for by tax income, rather than borrowing; and to get debt falling as a share of national income over a five year period.

The call to relax those rules has been fuelled by the decision of next German Chancellor Friedrich Merz – a centre-right politician – to exempt defence and infrastructure spending from the straitjacket of the country’s “debt brake”, which restricts borrowing.

In her resignation letter, the former international development minister Annelise Dodds called for a collective discussion of the Chancellor’s fiscal rules and approach to taxation.

This has also been backed by some big unions, notably Unite.

The internal criticism has been a source of frustration for the Treasury team.

A Treasury source emphasised the risks of this approach, pointing out borrowing costs had risen to a 30-year high in Germany following Merz’s announcement.

The chancellor is under great scrutiny ahead of her Spring Statement, against a backdrop of a stagnant economy.

But those close to her believe her critics’ suggestions also deserve scrutiny – and are forcefully pushing back on what they regard as unrealistic solutions.

If the UK followed the German example, No11 officials believe this could add £4bn to borrowing costs – the budget of some entire departments – and would risk higher interest rates and mortgage payments.

In other words, any hopes that some Labour MPs had that changes in the UK’s defence posture would unlock more borrowing have been very firmly dashed.

And some Labour politicians – not on the left – who are worried about the forthcoming welfare cuts are complaining about a lack of Treasury engagement.

The door to No11 is going to remain closed to many of them.

Government sources point out that backbench MPs have been meeting the No10 policy team, and work and pensions ministers, who have listened to their questions and concerns.

At ministerial level, there has also been some concern about the influence of the Office for Budget Responsibility – the umpire which decides if the government’s figures add up and if there is any ‘headroom’ in meeting fiscal rules.

One source suggested that it has been given a “god-like” status, with its economic forecasts treated like tablets of stone.

But Number 10 and Number 11 are both aware that any interference with this independent body would be politically toxic, inviting comparisons with Liz Truss, who ignored the OBR ahead of her disastrous mini-budget.

Treasury sources point out they have already tweaked their fiscal rules – changing the definition of public debt- without provoking the ire of the OBR.

And this has released billions more in borrowing for investment.

The tensions beneath the surface in Labour probably won’t recede until the government makes more progress in its central mission of delivering economic growth, which would reduce the need for tax rises and spending cuts.

Although just a snapshot, the January figures which show growth going in to reverse is politically (if not economically) significant, allowing opposition parties to push for a change of direction.

Conservatives and the Lib Dems want the chancellor to ditch what they dub a jobs’ tax – the National Insurance increase on employers, which is being introduced next month.

They argue this is holding back growth, but the chancellor won’t be for turning.

In fact, her prescription for low or no growth is to go “further and faster” in implementing policies which have already been announced.

That includes further deregulation and, following the abolition of NHS England, more arm’s-length bodies are in her sights.

As Reeves’s officials pore over the economic graphs ahead of her Spring Statement, perhaps they could draw up a new chart.

The one that demonstrates that economic growth and Labour dissent are in inverse proportion.