How much will it cost?

Labour’s initial proposal to overhaul the welfare system was a rushed attempt to slash billions of pounds from a rapidly increasing bill in order to assist the chancellor in meeting her self-imposed government borrowing regulations. However, the recent reversal of this plan raises serious concerns about the effectiveness of constantly adjusting financial strategies every six months to align with budget targets that are frequently changing due to various factors, including the uncontrollable cost of borrowing.

The latest agreement indicates that the welfare reforms will now only yield savings of £2 billion annually, a significant reduction from the anticipated £5 billion by 2029-2030. The proposed reduction in eligibility for disability Personal Independent Payment (PIP) was projected to generate the majority of these savings, amounting to £4.5 billion. Nevertheless, the revised changes will only impact new claimants starting in November 2026, sparing 370,000 current claimants out of the 800,000 identified in the DWP impact assessment.

Another modification announced in March, which will now only affect new claimants, pertains to how PIP applicants are assessed. Under the new criteria, individuals must score a minimum of four points for a single activity in order to qualify for support, as opposed to being eligible across a range of tasks. This adjustment, along with the introduction of a “co-production” approach involving disability charities, suggests that the anticipated cost savings may not be fully realized.

Additionally, there will be a ripple effect on Carer’s Allowance, with an estimated cost of around £2 billion. The original plan to freeze the health element of Universal Credit until 2029-2030 and subsequently halve it for new claimants, would have generated £3 billion in savings. However, adjustments now entail inflation-linked increases for existing recipients and exemptions for the most severe cases among new claimants, potentially costing up to £1 billion.

Furthermore, the government has pledged to accelerate investments in employment, health, and skills support to expedite the reintegration of health benefit recipients into the workforce. Originally scheduled for implementation next year, this initiative aims to provide full support amounting to £1 billion by 2029, enhancing the overall coherence of the reform package beyond mere cost-cutting measures.

Despite the complex nature of these changes and the inherent uncertainties in the initial cost projections, it is expected that the overnight deal will incur a total cost exceeding half of the original £5 billion savings, estimated at £2.5-3 billion. The Office for Budget Responsibility will unveil further details at the upcoming Budget presentation.

It is crucial to note that this additional expenditure, coupled with the £1.25 billion cost of the winter fuel payment U-turn, will necessitate either higher taxes or budget cuts in other areas to comply with the chancellor’s uncompromising borrowing regulations. The evolving landscape of welfare reforms underscores the challenges of striking a balance between fiscal responsibility and social welfare priorities within the government’s financial framework.