Labour Plans Benefit Revisions, Challenges Ahead for Chancellor

The Labour government has announced plans to increase benefit spending over the next five years, which may put additional strain on public finances ahead of the upcoming Autumn Budget scheduled for the end of November. Key among these changes is a proposal to partially lift the two-child benefit cap, a decision that could potentially cost up to £3.5 billion.

In a significant shift, the government has also decided to abandon proposed cuts to the Personal Independence Payment (PIP). Instead, Stephen Timms, the Minister for Disabled People, has been tasked with leading a comprehensive review of PIP. This review aims to present recommendations for improving the system by Autumn 2026.

Previously, the government argued that reducing welfare payments would increase incentives to work. However, a rebellion among backbench MPs against cuts totaling £5 billion to disability payments led to this policy reversal.

In an official statement released on October 30, the government emphasized the necessity of ensuring the sustainability of the PIP system. It noted that, according to projections from the Office for Budget Responsibility (OBR), expenditure on PIP is expected to nearly double from £18 billion to £34 billion by the fiscal year 2029/2030.

“The government is committed to making sure the system is sustainable,” the statement read. “The work of the review will operate within the OBR projections for future PIP expenditure to ensure it supports future generations.” The aim is to use public funds effectively to assist disabled individuals in living independent and fulfilling lives.

This policy announcement coincided with reports indicating Labour’s intention to modify the two-child benefit cap. Chancellor Rachel Reeves is expected to detail these changes during the Budget announcement, which are intended to address child poverty. Although the cap will not be eliminated entirely, the adjustments could add to the fiscal challenges Reeves faces, as the OBR has revised productivity forecasts, contributing to an estimated £30 billion fiscal gap that needs to be resolved through spending cuts and tax increases.

Speculation suggests that the government may shift from a flat cap on Universal Credit child payments to a tapered system, wherein the benefit amount decreases for each additional child. One anonymous Labour MP expressed concerns to the Financial Times, stating that increasing income tax while committing to new spending would be “mad.”

Opposition parties, including the Conservatives and Reform UK, have pledged to implement significant cuts to disability payments, which would drastically affect those with non-serious health conditions. The Conservatives aim to maintain the two-child benefit cap, criticizing Labour’s potential spending increase. In contrast, Nigel Farage of Reform UK has suggested that lifting the cap could encourage higher fertility rates in the UK.

As the Labour government navigates these complex decisions, the impact on public finances and the welfare system remains a critical focus. The forthcoming Autumn Budget will likely reveal how these policies will shape the landscape for benefits and support in the UK.