Rachel Reeves will unveil further welfare cuts in her spring statement after being told the reforms announced last week will save less than planned, Sky News understands.
The Office for Budget Responsibility (OBR) has rejected the government’s assessment that the package of measures, including narrowing the eligibility criteria for personal independence payments (PIP), will save £5bn.
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The fiscal watchdog put the value of the cuts at £3.4bn, leaving ministers scrambling to find further savings.
Ms Reeves is now expected to announce that universal credit (UC) incapacity benefits for new claimants, which were halved under the original plan, will also be frozen until 2030 rather than rising in line with inflation
As originally reported by The Times, there will also be a small reduction in the basic rate of UC in 2029, with the new measures expected to raise £500m.
A Whitehall source told Sky’s political editor Beth Rigby that it is “hard to tell how MPs will react”, as while the OBR’s assessment means fewer people will be affected by the PIP changes than thought, they “might be unhappy about the chaotic nature of it all”.
Spring statement: Rachel Reeves can make decisions on spending cuts without too much fallout for now – but worse could be yet to come
Voluntary exit schemes under way across government departments ahead of Rachel Reeves’ spending cuts
When is the spring statement – and what do you need to know about it?
The government did not publish an impact assessment of the crackdown on benefits it announced last week, saying that would come alongside the spring statement on Wednesday.
Several Labour MPs criticised the measures as pushing more sick and disabled people into poverty, while former Labour leader Jeremy Corbyn called the package a “disgrace” on Tuesday and accused the government of imposing austerity on the country.
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Spending cuts expected
Ms Reeves is expected to announce a large package of departmental spending cuts when she gives an update on the economy on Wednesday, potentially putting her on a further collision course with her own MPs.
Having only committed to doing one proper budget each year in the autumn, the spring statement was meant to be a low-key affair.
However, a turbulent economic climate since October means the OBR is widely expected to downgrade its growth forecasts for the UK while the government has borrowed more than previously expected.
This has wiped out the £9.9bn gap in her fiscal headroom Ms Reeves left herself at her budget last year – money she needs to make up if she wants to stick to her self-imposed fiscal rule that day-to-day spending must be funded through tax receipts, not debt, by 2029-30.
The chancellor has sought to blame global factors but the Conservatives blame measures like the national insurance tax hike on employers, saying this is choking business.
Shadow chancellor Mel Stride urged Ms Reeves to “use the emergency budget” to “fix her own mistakes and end Labour’s war on enterprise”.
Ms Reeves will defend her record in the spring statement, saying she is “proud” of what Labour has achieved in its first nine months in office.
However, on the eve of the statement, polling showed the public is pessimistic about what is to come.
According to More in Common, half think the cost of living crisis will never end, while YouGov found three-quarters of people want to see a tax on the richest over spending cuts.
Ms Reeves is not expected to announce any tax hikes, having said her tax-raising budget in October was a once-in-a-parliament event.
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Defence increase to ‘deliver security’
In a bid to fend off criticism, she will also announce an extra £2.2bn will be spent on defence over the next year to “deliver security for working people”.
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The money is part of the government’s aim to hike defence spending to 2.5% of the UK’s economic output by 2027 – up from the 2.3% where it stands now.
Ms Reeves will insist this plan, set out by the prime minister in February, was the “right decision” against the backdrop of global instability, saying it will put “an extra 6.4bn into the defence budget by 2027”.
“This increase in investment is not just about increasing our national security but increasing our economic security, too,” she will say.
The money is coming from reductions to the international aid budget and Treasury reserves, and will be used to invest in new technology, refurbish homes for military families and upgrade HM Naval Base Portsmouth.
