Fiscal Space

By now it looks all but certain that Chancellor Rachel Reeves will be announcing significant cuts to welfare in the Spring Statement in late March.

The additional £10bn of fiscal headroom that Reeves had generated in autumn has been wiped out by higher borrowing costs.

As I wrote on the ASI blog last month, amidst rising borrowing costs and terrible growth numbers, budget cuts have looked like an inevitability for a while.

Meanwhile, Germany’s incoming government has announced plans to amend the country’s constitutional debt brake, aiming to establish a €500 billion infrastructure fund and allocate up to €500 billion in off-the-books defence spending. 

As a reminder, Germany’s debt-to-GDP ratio stands at 62%, while the UK’s is somewhere around 95%. 

Taken together, Germany’s infrastructure and defence program would raise its annual deficit to approximately 2% of GDP—still well below the UK’s 4.8% for the 2023/24 financial year.

This brings us back to Rachel Reeves and the decisions she faces ahead of the Spring Statement. There, the trinity of welfare, triple lock, and net zero looms large. 

One of the few upsides of tight fiscal conditions is that they force the government to make tough decisions instead of kicking the can down the road. 

And while it looks like net zero and pensions won’t be touched for now, welfare seems to be the area that the Chancellor is looking at in seriousness.

Disability, incapacity, and out-of-work benefits are at an all-time high, all while labour force participation rates sill have not recovered to pre-pandemic levels. The OBR estimates that by the end of this parliament, half of all benefit claims will be for sickness, costing the taxpayer more than £100bn.

Getting people back to work would certainly benefit the economy, not only reducing welfare payments but also boosting tax revenues. 

For all its talk about wanting to grow the economy, Labour have achieved relatively little. Ultimately, only growth can get the country out of its fiscal malaise, which is why these welfare cuts should happen sooner rather than later.

One of the unwritten rules of politics seems to be that only the left can make effective cuts to welfare. It’s time that they get going.

Johannes Matt