Commenting on the latest developments, Helen Miller, Deputy Director (and incoming Director) of IFS, said:
“The government’s original reform was set to save £5.5 billion in the short run (by 2029–30) and double that in the long run when fully rolled out. Without reform to Personal Independence Payment, the watered down bill is not expected to deliver any savings over the next four years. This is because over this period the forecast savings from reducing the Universal Credit (UC) health element for new claimants (£1.7 billion in 2029–30) will be roughly offset by the cost of increasing the UC standard allowance.
There is a pronounced, ongoing rise in spending on working-age health-related benefits: spending has risen from £36 billion in 2019–20 to £52 billion last year and, without reform, is forecast to rise to £66 billion by 2029–30. It is clear that the government should be looking at reforms in this area, at least to ensure that the system is fit for purpose. After today’s climbdown, the government is effectively returning to the drawing board. The Timms Review may lead to savings, although Sir Stephen Timms, Minister of State for Social Security and Disability, has said that the review is not intended to save money. And this review is not due to report until autumn 2026.
Looking to this autumn’s Budget, the Chancellor, Rachel Reeves, can now expect forecast spending on social security to be higher than she had been planning back in March (when the Office for Budget Responsibility incorporated expected savings from these reforms into the fiscal forecast). The changes to this bill will effectively halve her margin of error against her main – and apparently “cast iron” – fiscal target, and that is before any potential downgrade to the underlying fiscal forecasts. Since departmental spending plans are now effectively locked in, and the government has already had to row back on planned cuts to pensioner benefits and working-age benefits, tax rises would look increasingly likely. This will doubtless intensify the speculation over the summer about which taxes may rise and by how much.
Perhaps more important than the precise number of billions involved, and what it might mean for the government’s so-called “fiscal headroom”, is the potential impact on how this government’s fiscal credibility is perceived. After all, this is a government with a majority of 165 that is seemingly unable to reform either pensioner winter fuel payments or working-age disability benefits. That doesn’t bode well for those hoping this government will grasp the nettle and address the deeper, structural challenges facing the UK public finances.”
