Keir Starmer took a decision some years ago to change the electoral base of the Labour Party so that many people, who would traditionally vote Conservative or Liberal Democrat, might now vote Labour or at least abstain from voting for their usual party.  A major tactic to achieve this result was a commitment to fiscal rectitude.

Starmer named Rachel Reeves as his proposed chancellor and she proclaimed from the rooftops the two fiscal rules which meant she could be trusted with the economy.  She reiterated her commitment to these fiscal rules in her Spring Statement on 26^th March.

However the fiscal rules created a very immediate problem for Reeves.  The first fiscal rule requires that current government spending should be matched by taxation within 5 years.  Since this was not likely to happen Reeves was left with two choices, cut current government spending or increase taxes.  Since Reeves had also committed to not increasing income taxes, her two choices collapsed to one choice, cut current government spending.

The spin doctors have been very busy over the past few weeks preparing the public for these cuts, particularly in the area of welfare spending.  Much has been made of the growth of one part of the welfare bill, Personal Independence Payments (PIPs) for those of working age, from £30 billion to £50 billion over the last few years.  That PIP cost may increase to £70 billion by the end of this parliament.  It is certainly an increase that warrants some investigation.  

Both the Resolution Foundation and the Institute for Fiscal Studies have suggested that it can be partly explained by the attempt of those unemployed to protect their standard of living in the face of the recent inflation.  Many unemployed discovered they could do this by registering for PIPs for disabilities that they had, but had not previously registered.  This could give them extra payments of some £4,000 per annum.  

There is no suggestion that there is fraud going on here.  Their level of disability does allow these people to genuinely register for PIPs.  This may go some way to explaining the dramatic increase in the PIP part of the welfare costs.  The government now say that PIP costs are too high and have therefore decided to change the rules of eligibility for PIP.   People who would previously have been entitled to PIP payments will find themselves some £4,000 worse off.  This change will affect hundreds of thousands of people and is projected by the OBR to reduce welfare costs by some £4.8 billion per annum in 2029-30.

From the political perspective, what is interesting about all this is not really the numbers.  What is interesting is that Labour, to meet its self-imposed fiscal rules, has decided to penalise that part of the electorate that would normally be considered its electoral base.  It confirms our belief that Labour has abandoned its old electoral base in favour of one that would traditionally vote Conservative or Liberal Democrat.  Rachel Reeves’ increase in the defence budget and reduction in the size of the state via cuts in the civil service will also appeal to these voters.  

There are over 4 years until the next General Election.  Reeves may well hope that economic growth will allow her, at some point, to be less indifferent to those less well off but we doubt she will give much thought to their plight.  It will be interesting to see how the changes in PIP disability rules impact the byelection in Runcorn and Helsby expected on May 1^st.  Over 12% of the working population, some 8,600 people, receive a PIP payment in that constituency.  

Reeves is pinning her main hopes on economic growth.  But there she is on decidedly shaky ground.  If the private sector lack the animal spirits to invest, there will be little growth unless Labour are prepared to step in and spend when the private sector refuses to do so.  But here Labour would run into a problem created by Reeves’ 2^nd fiscal rule, that national debt should be falling as a percentage of GDP by the end of this parliament.

Reeves’ fiscal rules and refusal to increase taxes may well have helped Labour win the 2024 General Election, but at the same time they have made the government very dependent on the private sector for economic growth.  Reeves could have used the infamous £22 billion black hole that she discovered on becoming chancellor or the need to re-arm in the face of real or imagined Russian aggression to increase taxes and relax her fiscal rules.  Germany used the need to re-arm to relax its fiscal rules.

So far Reeves has chosen not to, presumably because she believes it is critical to retaining Labour’s new electoral base.  She is putting her faith in the private sector.  We suspect she  will live to regret that decision.