The Costly U-Turn: How Changes to Disability Benefits Impact the Budget

In a surprising political shift, Labour’s welfare reform plans are undergoing a major U-turn, originally intended to cut £5 billion from a growing welfare bill. The recent adjustments are now projected to save only £2 billion a year, significantly less than the original estimate, raising questions about the government’s financial credibility and stability.

Central to these savings was a proposed cut to eligibility for Personal Independence Payments (PIP), which was expected to provide the bulk of the savings—£4.5 billion—by limiting access to new claimants starting November 2026. This plan spares 370,000 current claimants out of 800,000 identified for review. The changes to PIP assessments also shift the qualification criteria to a four-point threshold, which raises concerns about how it will affect potential funding cuts and whether disability charities will influence its implementation as indicated by rebel leader Meg Hillier.

Moreover, adjustments to the Carer’s Allowance and universal credit health changes are anticipated to cost the government around £2 billion, directly impacting 2.25 million existing recipients who will now receive inflation-linked increases. The halting of the halved rate for new claimants marks a critical shift in this policy approach. The government is also attempting to mitigate further fallout by advancing investments in employment, health, and skills support, showing a more coherent reform strategy rather than stark cutbacks.

Amidst all these changes, estimates suggest that the overall financial impact of this U-turn stands at £2.5-3 billion, creating challenges for the Chancellor, especially when considering existing costs like the £1.25 billion associated with the winter fuel payment U-turn. The looming Budget announcement from the Office for Budget Responsibility is set to clarify the full implications of these financial maneuvers, but one thing is clear: the government’s refusal to allow greater borrowing has set the stage for tough decisions ahead, with potential implications for taxes and other budget allocations.