The government has U-turned on disability benefit reforms announced in March – another major policy shift after backtracking on Winter Fuel Payments earlier this month.
Details emerged at the end of last week but were confirmed by work and pensions minister Liz Kendall in a statement to Parliament today (30 June).
Claimants who qualify for personal independence payments (PIP) or the health element of Universal Credit will now continue to receive these benefits at the same rate, rather than facing cuts. Cuts will still hit future claimants.
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Previously, the government had announced plans to narrow the eligibility criteria for PIP so that claimants had to score a minimum of four points on at least one daily living activity to be eligible for the payment.
The government had also planned to freeze the health element of Universal Credit at £97 per week until 2029/30, rather than increasing it in line with inflation.
Both policies incited fierce backlash from Labour backbenchers and disabled organisations. Prime minister Keir Starmer granted the concessions after more than 120 Labour backbenchers looked set to rebel at a Commons vote on the welfare bill on Tuesday (1 July).
While the bill now stands a better chance of making it through Parliament, the concessions will cost the government £2.5 billion per year by 2030, according to figures shared by Kendall today.
This means the U-turn slashes the government’s original saving in half. The policy was initially expected to save £5 billion per year by 2030.
The latest developments will create a headache for chancellor Rachel Reeves. She set the budgets for government departments through to 2028/29 in her Spending Review on 11 June, back when benefit cuts were still expected to create a £5 billion annual saving.
Reeves’s fiscal rules mean she cannot borrow to fund day-to-day spending, and debt also needs to be falling as a share of the economy by 2029/30. Weak economic growth and high borrowing costs have made it more difficult to meet these rules.
This has left Reeves with limited fiscal headroom, otherwise known as the amount of leeway the government has to increase spending or cut taxes.
In analysis published last week, the Institute for Fiscal Studies (IFS) said: “Had these new changes been announced ahead of the Spring Statement, instead of maintaining her ‘headroom’ against her main fiscal rule at £9.9 billion, the chancellor would have seen it drop to less than £7 billion.”
With spending cuts coming up against fierce resistance, tax hikes this autumn are looking increasingly likely.
What do the changes mean for PIP and Universal Credit claimants?
The climbdown means around 370,000 existing PIP claimants will have £4,500 protected per year, on average, according to the Resolution Foundation.
The changes will also indirectly impact their carers, who will continue to receive Carers’ Allowance. Together, it means the U-turn on PIP will cost the government £2.1 billion by 2029/30, according to the Resolution Foundation’s calculations.
Similarly, recipients of the health element of Universal Credit no longer face having their support frozen at £97 per week. Those who already receive the benefit will continue to see it increased each year in line with inflation.
“This will insulate 2.25 million people from a loss of between £250 and £500 per year, and will cost between £540 million and £1.1 billion, depending on how it is implemented,” the Resolution Foundation said.
The climbdown will only benefit existing claimants; new claimants will still be impacted by the cuts. Critics of the policy say this will create a two-tier system.
“The decision is to protect existing health-related benefit claimants from the reforms, thereby making the savings entirely from new claimants to these benefits,” said Tom Waters, associate director at the IFS.
“This will create big differences – thousands of pounds a year, for many years in some cases – between similar people with similar health conditions who happen to have applied at slightly different times.”
New modelling published by the government today suggests around 150,000 people will be pushed into poverty by 2030 as a result of the welfare cuts. This is lower than the previous figure of 250,000 – forecast before the government scaled back its proposals – but is still significant.
A Downing Street spokesman told the BBC that the modelling “doesn't reflect the full picture” and is “subject to uncertainty”.
Additional funding to help people back into the workplace
In further details unveiled to Parliament today, Kendall also announced an increase in funding to help people back into the workplace.
An additional £300 million will be invested over the next three years, bringing the total investment to £600 million next year, £800 million the following year, and £1 billion in 2028/29. This will increase total spending to £3.8 billion this Parliament.
“Welfare reform is never easy but it is essential, because there is no route to equality or social justice based on greater benefit spending alone,” Kendall said. “Our reforms are rooted in our fundamental belief that everyone can fulfil their potential and live their hopes and dreams if we provide them with the right support.”
Almost three million people are currently out of work due to long-term sickness, while one in eight young people are not economically active or in education.
Government under pressure
The policy reversal is good news for those whose disability benefits were set to be squeezed, but it represents a growing crisis at the heart of Westminster. Government finances are stretched and any attempts to make savings are being met with resistance.
In the immediate aftermath of last summer’s election, the prime minister adopted a tough tone and sought to convince the public he was prepared to make “painful decisions” to rebuild the UK economy. A year on, many of the tough decisions initially announced have been reversed.
Part of the problem is that despite securing a large majority, Starmer is having trouble controlling his backbenchers. The signs appeared within weeks of the election win last July, when he suspended the whip from seven rebel MPs who voted against the government in an attempt to scrap the two-child benefit cap.
Public opinion has also been a challenge. The decision to scrap the universal Winter Fuel Payment was deeply unpopular and is seen as partly responsible for Reform UK’s significant local election gains in May.
Under pressure, the government backpedalled on the policy in June, reinstating the benefit for those with a retirement income of less than £35,000 per year. The decision undermined the government’s credibility and reduced its annual saving on Winter Fuel Payments from £1.7 billion to £450 million.
“The government is between a rock and a hard place for the Autumn Budget,” said Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown. While spending cuts are “fraught with difficulty”, tax hikes are never popular either. There are also limited channels left for Reeves to tap into, having ruled out hikes to the three main working taxes.
“[The government] might opt to make a host of smaller changes, raising more modest chunks of tax with each one, but causing serious issues for anyone affected. The more changes it makes, the more far-reaching these impacts become,” Coles added.
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