Starmer’s Mounting Bill: Welfare U-Turn, Child Benefit Cap, and Defence Spending Create an £8bn Fiscal Headache
Prime Minister Keir Starmer’s Labour government is grappling with an escalating financial challenge, as a significant welfare U-turn, coupled with hints about the future of the two-child benefit cap and an ambitious defence spending pledge, could collectively blow an £8 billion hole in the Chancellor’s carefully laid Spending Review plans. This fiscal squeeze is leading economists to predict an almost inevitable wave of tax rises, raising critical questions about the government’s financial discipline and its ability to deliver on core promises.
The Welfare U-Turn
A Costly Retreat Just weeks into office, the Labour government has executed its third major U-turn, conceding to a widespread rebellion from its own backbenchers over planned welfare reforms. Work and Pensions Secretary Liz Kendall confirmed that existing claimants of Personal Independence Payments (PIP) and the health element of Universal Credit will continue to receive their current benefits. This protects an estimated 370,000 PIP claimants and 2.2 million Universal Credit recipients from cuts.
However, this political victory for the rebels comes at a steep financial price. Protecting existing PIP claimants is estimated to cost an extra £1.5 billion annually, while unfreezing the Universal Credit health element and other adjustments add another £1.5 billion. This amounts to a £3 billion U-turn on welfare reforms alone, significantly eroding the £5 billion in savings the government initially hoped to achieve by 2030.
The Two-Tier System Controversy
While the U-turn appeased many, it has sparked a fresh row over the creation of a two-tier benefits system. Critics, including Labour MPs Alex Sobel and Brian Leishman, argue that by applying the cuts only to future claimants from November 2026, the government is creating a disparity where individuals with the same disabilities could receive vastly different levels of support. New PIP claimants could be over £5,000 worse off annually, with new Universal Credit health element recipients losing an average of £3,000 a year. This raises profound questions about fairness and equity within the welfare state.
The Shadow of the Two-Child Benefit Cap
Adding to the fiscal pressure, Prime Minister Starmer has strongly hinted his agreement with backbenchers that the controversial two-child benefit cap should be scrapped. While not yet a formal policy, such a move, if enacted, is estimated to cost an additional £3.5 billion annually. The confluence of the welfare U-turn and the potential removal of the child benefit cap means Chancellor Rachel Reeves is now staring down a potential £8 billion shortfall in her economic forecasts.
A Further Financial Strain
Beyond welfare, the government has also committed to a significant increase in defence spending. While £6 billion has already been reallocated from the foreign aid budget, Starmer’s promise to raise core defence spending from 2.6% of GDP to 3.5% by 2035 represents an enormous long-term commitment. This translates to an estimated £30 billion a year extra in today’s money. While this is a gradual ramp-up, economists believe the Chancellor will need to start factoring this into financial plans well before the next election, adding further strain to public finances.
The Chancellor’s Conundrum
Facing an £8 billion unbudgeted spending commitment, the options for Chancellor Rachel Reeves are stark. Economists widely agree that the most likely route to bridge this gap will be tax rises. An extra penny on the basic rate of income tax is cited as one measure that could generate most of the required £8 billion. This would mark a significant departure from Labour’s pre-election rhetoric and could prove politically challenging for a government that promised stability.
Starmer’s Authority and the Rebel Factor
This string of U-turns on winter fuel payments, grooming gang inquiries, and now welfare raises serious questions about Starmer’s authority within his own party. The successful backbench rebellion on welfare, driven by over 120 MPs, suggests a confident and organized internal opposition. While Starmer maintains the government is listening, critics argue he is caving in under pressure, a perception that could undermine his leadership and policy delivery in the long run.
Starmer’s Fiscal Challenges and Spending Commitments
| Category | Policy/Commitment | Estimated Annual Cost (by 2030/2035) | Key Impact / Notes |
| Welfare U-turn (Immediate) | Protecting existing PIP claimants | £1.5 billion | Prevents cuts for ~370,000 current PIP recipients; creates “two-tier” system where new claimants could be £5,000+ worse off. |
| Protecting existing UC Health element claimants | £1.5 billion | Prevents cuts for ~2.2 million existing UC recipients; new claimants could lose £3,000 annually. | |
| Previous U-turn | Restoring Winter Fuel Payments | £1.5 billion | Adds to overall unbudgeted spending. |
| Potential Future Welfare | Scrapping the Two-Child Benefit Cap | £3.5 billion | Strongly hinted by Starmer; could lift ~350,000 children out of poverty but adds significant fiscal pressure. |
| Total Unbudgeted Welfare Costs | Combined U-turns & Potential Cap Scrap | £8 billion | Direct fiscal hole in Chancellor Rachel Reeves’ spending plans, highly likely to necessitate tax rises. |
| Defence Spending Target | Increase core defence to 3.5% of GDP by 2035 (part of 5% national security target) | £30 billion (annual extra in today’s money) | Significant long-term commitment requiring substantial increases; adds further pressure on public finances, potentially requiring earlier ramp-up. |
Summary of Financial Implications:
- Total immediate U-turn cost: £4.5 billion (£3bn welfare + £1.5bn winter fuel).
- Potential total unbudgeted spending (including child cap): £8 billion.
- Long-term defence commitment: £30 billion annual increase by 2035.
- Consequence: Increased likelihood of tax rises in the autumn Budget.
Conclusion
The Labour government is navigating a complex and increasingly expensive landscape. While the welfare U-turn may have averted an immediate parliamentary crisis, it has created a significant fiscal hole and a contentious two-tier system. Coupled with potential changes to the child benefit cap and ambitious defence targets, the pressure on Rachel Reeves to find new revenue streams is intensifying. The choices made in the coming months will not only define Labour’s economic policy but also profoundly shape the lives of millions across the UK.
Frequently Asked Questions (FAQs)
What was Keir Starmer’s major welfare U-turn about?
The government reversed plans to cut benefits for existing Personal Independence Payment (PIP) and Universal Credit health element claimants, applying cuts only to future claimants.
How much will the welfare U-turn cost the government?
Protecting existing claimants is estimated to cost an additional £3 billion annually, plus £1.5 billion from a previous winter fuel payment U-turn.
What is the two-tier welfare system controversy?
It refers to concerns that future benefit claimants with the same disabilities may receive less support than existing ones due to the U-turn’s selective application.
How does the two-child benefit cap relate to this financial challenge?
Starmer has hinted at scrapping the two-child benefit cap, which could add an estimated £3.5 billion to unbudgeted spending.
What is the government’s new commitment to defence spending?
The government plans to increase core defence spending from 2.6% to 3.5% of GDP by 2035, adding a significant long-term cost to the public finances.
What is the total estimated financial impact of these commitments?
Combined, the welfare U-turn, potential child benefit cap removal, and defence commitments could create an £8 billion unbudgeted spending challenge.
Will these new costs lead to tax rises?
Economists suggest that tax rises, such as an increase in the basic rate of income tax, are now very likely to cover the burgeoning costs.
How does this affect Keir Starmer’s political authority?
This is the third major U-turn for Starmer’s government, raising questions about his leadership and ability to maintain party discipline in the face of backbench rebellions.
