Britain's Chancellor of the Exchequer Rachel Reeves outlines the Budget later this week. Photo / Getty Images
Chancellor of the Exchequer Rachel Reeves will unveil £15 billion ($35b) of extra benefits spending in this week’s Budget, funded by a tax raid on the middle classes.
The Chancellor will end the two-child benefit cap in its entirety and increase benefit payments by nearly 4%, while financing about-turns on winter fuel cuts and welfare reform.
She will also drag an estimated nine million people into paying higher rates of income tax by freezing thresholds in a move critics argue breaks Labour’s election manifesto pledges.
The annual cost of the four policies comes to £15b, which, added to changes in Reeves’ 2024 Budget, amounts to an extra £18b to the benefits bill since Labour took power in Britain last year, according to a Telegraph analysis.
The plans have fuelled warnings that the Treasury is “vulnerable” to a market backlash unless the country’s public spending, which is being pushed up by welfare bills, is controlled.
Prime Minister Sir Keir Starmer is under pressure to keep Labour MPs onside amid speculation about plots against his leadership, with fewer than one in five voters supporting his party in the polls.
Writing in the Telegraph, Mel Stride, the Conservative shadow chancellor, argued that the Budget “welfare splurge” was being funded by “the very people who are already struggling” via tax rises.
Stride said: “Only months ago, Reeves attempted to deliver £5b of welfare savings. Her own MPs forced her into a humiliating U-turn.
“Now, scrapping the two-child cap will add billions more to the welfare bill, even as Personal Independence Payment spending alone is forecast to rise by a third this Parliament. Instead of confronting the ballooning welfare budget, Labour is waving it through.
“And who will pick up the bill? Hard-working families.”
A Labour spokesman said: “Mel Stride personally oversaw the biggest increase in benefits spending in decades during his time as Work and Pensions Secretary. He’s a hypocrite of the highest order.
“Labour is fixing the Tories’ mess and our Budget will cut the cost of living, cut waiting lists, and cut national debt. The only thing the Tories would cut is people’s public services once more.”
Andy Haldane, the former chief economist at the Bank of England, said that after the “fiscal fandango” of recent months, Reeves needed to reassure the markets.
He told the BBC: “Financial markets do need to see some signs that this Government is capable of getting its arms around public spending. It really does.
“This is a vulnerable moment ... The ground disappears beneath their feet in the financial markets. That is to be avoided at all costs.”
The Chancellor will unveil a series of tax rises at the Budget this Wednesday, (Thursday NZT) ending months of speculation about how she will fill a black hole in the public finances of up to £30b from deteriorating economic forecasts.
Reeves tried to get ahead of criticism by touting a boost to the triple lock for 13 million pensioners – another part of welfare state spending which is estimated to cost around an extra £8b next year – which will be officially announced tomorrow NZT.
The uplift will hand an extra £550 a year to those on the new state pension or £440 for the basic state pension.
Reeves said: “Whether it’s our commitment to the triple lock or to rebuilding our NHS to cut waiting lists, we’re supporting pensioners to give them the security in retirement they deserve.
“At the Budget this week, I will set out how we will take the fair choices to deliver on the country’s priorities to cut NHS waiting lists, cut national debt and cut the cost of living.”
However, the rise, combined with an expected stealth tax raid, will see more than 1.7 million people start paying tax on their pension by 2027.
Reeves will freeze income tax thresholds for another two years, despite suggesting in her Budget last autumn that this would breach Labour’s promise not to put up taxes for “working people”.
A new analysis from the Liberal Democrats suggested that this move will drag nine million people into paying either the 20% basic rate or the 40% higher rate by 2030.
The policy is one of what has been dubbed a “smorgasbord” of tax rises after her initial plan to increase income tax rates was abandoned amid a political backlash.
The Chancellor is expected to target expensive homes, gambling, dividends, salary sacrifice schemes and electric vehicles with a new pay-per-mile tax.
She has reportedly watered down plans for a mansion tax over fears it could punish people who are asset rich but cash poor.
She has pared back plans for the property tax, increasing the threshold at which it applies from £1.5 million to £2m, according to the Times. This means it will affect 150,000 rather than 300,000 households.
But the approach is facing criticism from political opponents who are asking why she is not reducing the benefits bill but announcing four measures to increase it.
Reeves is expected to lift the two-child benefit cap in full, despite the policy being popular in polls, following pressure from Labour MPs.
The move will cost around £3b a year. Starmer and Reeves will hail the move as taking hundreds of thousands of children out of poverty – a stated goal of their time in office.
The second move will see working-age benefits uprated in line with inflation.
The 3.8% rise, which kicks in from April, will cost an estimated £6b. In contrast, Tory chancellors between 2015 and 2019 chose to freeze working-age benefits except for disability payments.
The third and fourth benefits payment changes follow about-turns, which Starmer and Reeves were forced to adopt since the last fiscal statement to MPs in the northern spring.
The pair were made to gut a Personal Independence Payment reform package by Labour rebels, losing almost all of the £5b savings, and reinstate winter fuel payments for most pensioners, costing £1.25b.
Collectively, those four changes add around £15.25b to the benefits bill, either from lost savings or additional spending decisions.
Combined with the Chancellor’s decision to uprate working-age benefits by 1.7% last year, which cost an estimated £2.7b, the total comes to £18b across both Budgets.
The total does not factor in wider changes forecast in the years ahead. Annual spending on health and disability benefits is expected to surge to £100b by 2030.
Some Labour MPs on the right of the party’s political spectrum have argued for the need to control welfare spending, but left-wing critics of cuts have had more sway so far since the general election.
Two government reviews are due to propose recommendations next year in time for the reforms – and potential cost-savings – to be incorporated into the 2026 Budget.
The Prime Minister’s political position, which saw his team rush out assurances that he would fight any leadership contest amid speculation of rivals on manoeuvres earlier this year, has made taking on internal critics and pushing through welfare reform even harder.
Sharon Graham, the general secretary of Unite, one of the country’s biggest trade unions, said Starmer and Reeves should go if they failed to unveil left-wing policies in the Budget.
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