You may have seen the news overnight about the Government’s welfare reform Bill and the debate which was – for lack of a better word – chaos on the floor of the House.
What happened?
Last night, as the Bill was being debated in the Commons, the Minister announced that the Government’s key sections of the Bill would be removed, having earlier had the Secretary of State open the very same debate with all the measures in. Doing this, mid-debate, is unprecedented.
So why did this happen? The Government had persisted with the Bill, despite opposition from all sides of the House and importantly - their own MPs, which put the vote at risk of failing. Votes such as this can also be seen as confidence motions. To lose such a vote would leave many with questions over the Prime Minister’s authority among his own backbenchers.
This explains the implications well: https://www.bbc.co.uk/news/articles/czry6gv80mjo
What yesterday’s last-minute concession has meant is that a Bill Labour brought in, in an attempt to save around £5bn, will now actually COST an estimated >£100m.
And yet there is no other sign of how the Government is going to cut costs. The current welfare bill is estimated to reach £100 billion by the end of the decade... so even the original £5bn was small in comparison.
Why does this matter?
Politically, it raises questions about the Government’s ability to pass measures which may be unpopular with some of its MPs, such as cutting public spending.
Economically, this has very real-world consequences for the Chancellor, who must now find ways to make up the funding shortfall.
The latter is particularly difficult in the face of current economic difficulties: growth forecasts have been repeatedly slashed, business confidence continues to fall, unemployment up 10% since the new Government came to power, and 10yr borrowing rates higher than in 2022.
Not to mention household disposable income – one of the PM’s self-stated economic targets– has fallen at its fastest rate in two years.
So what happens next?
There are three options available to the Government:
- Cut public spending,
- Change Reeves’s new fiscal rules to increase borrowing,
- Or raise taxes.
The Chancellor has said her borrowing rules are cast iron and won't change.
The Labour backbenches have proved they can't pass spending cuts.
Which only leaves tax rises.
The latter – if we are to follow what Pat McFadden, Chancellor of the Duchy of Lancaster, said this morning, about there being “financial consequences” for last night’s U-turn – seems the most likely outcome for the Autumn Budget later this year.
