Chess-playing Reeves is in a political zugzwang over welfare
A looming rebellion on welfare reforms is casting doubt on Rachel Reeves’ ability to meet her fiscal rules, says Helen Thomas
As we approach the first anniversary of the first Labour government in 14 years, we also approach its first significant rebellion. According to the analysis of our team at BlondeMoney, next week’s vote on welfare reforms will almost certainly fail. We calculated a score for each Labour MP of how likely they are to rebel, based on various quantitative criteria. The black line on the chart below shows where the government loses its majority if every MP to the left of the line were to vote against. MPs who have signed the “reasoned amendment” that aims to kill the bill are shown in grey, demonstrating how broad the unhappiness runs.
This isn’t just a sideshow scuffle within the Labour Party. It is a flashing red warning light that the government cannot manage the country’s huge pile of debt.
Gilt markets are not yet ruffled. They have so far simply assumed higher taxes and lower spending will be delivered in order to honour the sacrosanct fiscal rules. But if the government can’t pass a vote to save £5bn with a working majority of 165 then how will they ever agree to any tough decisions in the future?
When a political constraint becomes a fiscal constraint
The political constraint is now biting on the fiscal constraint – Labour MPs simply didn’t sign up to sacrifice their moral shibboleths at the altar of the OBR. Their huge majority wasn’t a mandate for what seems to be taking money from pensioners, farmers and now the disabled. Or at least that’s the narrative that has taken hold as Labour support has plummeted in the polls, with the latest from Ipsos Mori showing dissatisfaction with the government near the lows plundered by Gordon Brown in the aftermath of the financial crisis in 2008.
With Reform UK taking a commanding lead and Labour having lost the same proportion of councillors as the woebegone Conservatives in the recent local elections, Labour MPs want to stem the bleeding. Days before Nigel Farage promised to reinstate the winter fuel allowance and scrap the two-child benefit cap, Keir Starmer announced his U-turn on removal of the winter fuel payment. This has given hope to MPs that they can similarly push for adjustments to the welfare reforms.
So far Starmer and Reeves have been steadfast that there can be no changes made to the legislation. Internal opponents have been forced to go public in an attempt to pressure a compromise. Letters and statements achieved nothing and so we have now seen the resignation of a government minister, Vicky Foxcroft, over the proposals. And not just any minister – one of the government’s whips, who are the very people tasked with whipping their colleagues into supporting the bill. It’s like the colonel of a regiment having their staff sergeant refuse to obey orders. Not a sign of a successful battle plan.
And now the chairs of 11 select committees, including the powerful Treasury Select Committee, have put together an amendment that would effectively kill the bill. One of the reasons given is “Because the Office for Budget Responsibility is not due to publish its analysis of the employment impact of these reforms until the autumn of 2025” – hinting that if there were more evidence from the OBR, then the bill could pass at a later date. This gets to the heart of the economic problem facing the politicians who have misunderstood that they are somehow able to wait until later. Reeves needs the bill to pass now so that it has an immediate impact on the OBR as they enter the forecasting period ahead of the autumn budget. This would help Reeves to find more of the elusive fiscal headroom that she so desperately seeks. Waiting makes her position worse, as that would be £5bn of savings that she would need to find elsewhere.
As a chess-player she must recognise that she is stuck in zugzwang: if the bill falls, meeting the fiscal rules gets harder. But to pass the bill, MPs are demanding that she ease its impact, also making her job harder.
Gilt markets should recognise that whatever happens in the vote next week, the political constraint on the government has left it in a weaker position. The risk premium on UK debt has risen. The latest borrowing numbers were already the second highest ever for the month of May. As the Deputy Director for the public finances at the ONS pointed out, “While receipts were up, thanks partly to higher income tax revenue and national insurance contributions, spending was up more, affected by increased running costs and inflation-linked uplifts to many benefits“. If Reeves can’t get on top of government spending, she is fighting an uphill battle. She almost certainly didn’t expect after such a huge election victory that it was her own side that she would be fighting.
Helen Thomas is chief executive of Blonde Money