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BBC News business reporter, Dearbail Jordan, reports that Chancellor Rachel Reeves’ plan to reduce welfare costs through reforms has been severely impacted due to major government concessions on the benefits bill. The forecasted savings of £5bn by 2029-30 have taken a hit, coming right after a U-turn on the Winter Fuel Allowance. This has led to the near elimination of the government’s £10bn buffer intended to maintain public finances on track. As the Autumn Budget looms closer, Reeves faces five options to address the financial challenges.
One potential course of action for the government is to adopt a ‘wait and see’ approach, monitoring the UK economy’s growth and debt interest costs. However, this could prove risky as existing factors have already eroded the buffer, with uncertainties surrounding the impact of trade tariffs under the Trump administration. Despite the UK securing a deal with the US, challenges like steel shipments remain unresolved, presenting ongoing economic risks.
Another option involves seeking new savings, given the recent Spending Review announcement by Reeves. While some sectors like the NHS received additional funds, other departments faced cuts or stagnant budgets. This method could prove disruptive and hint at a lack of fiscal planning. Moreover, questions linger on the affordability of removing the two-child benefit cap, indicating financial constraints.
Reeves’ firm stance on financial rules adds another layer to the limited choices available. The chancellor had outlined stringent financial principles to maintain fiscal stability and restore credibility. Although altering the rules is possible, it could unsettle markets and result in increased debt interest payments. Maintaining these regulations underlines the government’s commitment to financial prudence despite external pressures.
Lastly, options like increasing taxes or extending the freeze on thresholds may be considered to offset dwindling resources. Labour’s promise not to burden working individuals with tax hikes limits Reeves’ maneuverability. Extending the threshold freeze, although perceived as a tax raise, could boost government revenue substantially. Balancing these decisions in the face of financial challenges will be pivotal for Reeves and the government’s economic strategy
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