Labour’s £3bn U-turn on PIP and Universal Credit adds pressure for Reeves

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.

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).

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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The government had hoped to save £5 billion per year by 2030 through the benefit reforms, but the U-turn could reduce this figure to £2 billion.

“The concessions aren’t cheap, costing as much as £3 billion and more than halving the medium-term savings from the overall set of reforms announced just three months ago,” said Ruth Curtice, chief executive of the Resolution Foundation think tank.

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. With spending cuts coming up against fierce resistance, tax hikes this autumn are looking increasingly likely.

Benefit cuts: which reforms has the government shelved?

In March, the government announced a string of benefit reforms intended to slash the welfare bill by £5 billion per year by 2029/30.

One of the main measures included tightening the eligibility criteria for PIP – a payment received by those who have difficulty completing everyday tasks like preparing food or washing themselves.

The government also announced plans to freeze the health element of Universal Credit at £97 per week until 2029/30, rather than increasing it in line with inflation. For new recipients, the health element will be reduced to £50 per week in 2026/27 before being frozen until 2029/30.

Today (27 June), the government confirmed plans to back down on large parts of its reform package, meaning changes to PIP and Universal Credit will only impact new 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.

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.

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.

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 Starmer suspended the whip from seven rebel MPs who voted against the government in an attempt to scrap the two-child benefit cap.

Having initially been firm on the policy, the prime minister has shown signs of softening his stance in recent months.

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.

She points out that spending cuts are “fraught with difficulty” – but raising taxes also comes with a host of challenges, particularly given that the government has promised not to touch the three main working taxes during this parliament.

“They 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 they make, the more far-reaching these impacts become,” Coles added.