IFS Urges Rachel Reeves to Consider Welfare Cuts in Upcoming Budget

Financial experts from the Institute for Fiscal Studies (IFS) have urged Rachel Reeves, the UK Chancellor of the Exchequer, to contemplate significant welfare cuts in her upcoming budget announcement in March 2024. This recommendation comes as a strategy to address a projected £22 billion shortfall in government finances, which has raised concerns among investors and analysts.

In light of recent hints from Reeves indicating potential spending cuts, the IFS emphasized the need for bold measures to restore fiscal stability. The think tank cautioned against merely “doing the bare minimum” to comply with fiscal rules that mandate day-to-day spending be matched by revenues by the end of the current parliamentary term. The IFS report suggests that alongside welfare savings, tax increases might also be necessary to fill the financial gap.

The report outlines several potential welfare adjustments that could be considered. These include eliminating the pensions triple lock, implementing further reductions in health-related and disability benefits, and restricting growth in funding for special educational needs. Such measures, however, risk straining relations with Labour backbench MPs, particularly following a previous government reversal on welfare cuts earlier this year.

Ben Zaranko, associate director at the IFS, highlighted that any proposed changes should be framed as reforms aimed at improving individual outcomes. He stated, “Trying to do it to chase particular savings isn’t a recipe for success.” The IFS’s annual “green budget” report advises that Reeves may need to raise at least £22 billion through a combination of spending cuts and tax increases to rebuild the £9.9 billion of headroom left at the previous spring statement.

With rising borrowing costs, diminished productivity forecasts, and recent welfare reversals, the Office for Budget Responsibility is expected to deliver a significant downgrade in financial projections for the government. The IFS contends that raising a more substantial amount of revenue could create a larger safety net, mitigating future uncertainties regarding fiscal compliance.

Helen Miller, director of the IFS, noted the risks of continuing under persistent speculation about fiscal policies. “That wouldn’t be costless – but nor is limping from one forecast to the next under constant speculation that policy will be tightened again,” she said.

The report, produced in collaboration with Barclays, stresses the importance of presenting any revenue-raising measures as credible to enhance investor confidence. Moyeen Islam, a fixed income strategist at Barclays, remarked that a credible approach to welfare cuts would indicate the government’s willingness to tackle challenging decisions. “If you can’t do this with a 150 MP majority, or whatever it is, then when will you do this?” he questioned, emphasizing that such actions would bolster credibility in fiscal management.

Investor sentiment appears wary of Reeves adopting a piecemeal approach to financial recovery, which could involve minor tax increases rather than substantial reform. Islam warned that a lack of coherent and credible policies could lead to adverse market reactions.

In response to the ongoing discussions about potential welfare cuts, a spokesperson from HM Treasury stated, “We won’t comment on speculation. The chancellor’s non-negotiable fiscal rules provide the stability needed to help to keep interest rates low while also prioritising investment to support long-term growth.”

As the budget announcement approaches, the pressure mounts on Reeves to navigate the delicate balance between fiscal responsibility and political feasibility, ensuring that her decisions resonate positively with both the public and financial markets.