(Bloomberg) -- Keir Starmer risks another battle over his Labour government’s controversial first budget, as the UK prime minister sets out his plan to reduce welfare spending by getting more people into work — at the same time as companies are warning of job cuts due to higher taxes.
The government will publish its “Get Britain Working” white paper on Tuesday, a strategy Starmer said would help lower the £137 billion ($172 billion) benefits bill by tackling economic inactivity. Measures to be announced by Work and Pensions Secretary Liz Kendall include more support for job seekers and the removal of welfare payments from people who refuse education or training.
The changes are part of the Labour’s promise, first announced in July, to increase the employment rate to 80% from 74.8%. Economic growth has long been held back by economic activity, while taking aim at the welfare system also illustrates how the Labour government is following through on £3 billion of welfare spending cuts budgeted by the previous Conservative administration.
But it’s a plan Starmer is trying to deliver against a backlash from businesses over job creation, and a crackdown on welfare also risks triggering disquiet from Labour MPs on ideological grounds. On Monday, the head of the country’s most influential business lobby said firms are in “damage control” after Chancellor of the Exchequer Rachel Reeves’ tax-raising budget, and that nearly half are planning to reduce the size of their workforce.
“Tax rises like this must never again be simply done to business,” CBI head Rain Newton-Smith said at the lobby group’s annual conference in London. “When you hit profits, you hit competitiveness, you hit investment.”
Such rhetoric has been a significant post-budget headache for Starmer, who came to power on a pro-enterprise promise to boost growth and living standards. Instead, sentiment declined as Reeves revealed more than £40 billion in tax rises, which she blamed on a fiscal black hole left by the Tories.
The bulk of the money raised came from an increase to national insurance, a payroll levy, and the scale surprised many firms. In a CBI survey with 185 responses, about six in 10 businesses said the budget would not make the UK more attractive for investment, and many said they were not willing to invest, expand or take a chance on new people.
“It’s becoming harder to understand what the case for investment is,” Salman Amin, chief executive officer of snacks company Pladis Foods Ltd., the parent company of McVitie’s biscuits, said at the conference.
Defending her budget, Reeves said she’d registered the critical feedback but argued that repairing public finances would give companies the stability needed to invest. She also said she hadn’t heard any viable alternatives, and tried to reassure the audience that future budgets would not resemble her debut one.
“We have now drawn a line under the inheritance I faced,” she said. “You can be confident about the tax rates that we’ve set for this Parliament.”
The risk for Starmer and Reeves is that so much of their policy agenda hinges on improving the economy. The chancellor said Monday she should be judged on whether she delivers growth, while the welfare plan to be set out on Tuesday also relies on jobs to be available for people to enter the workforce.
The challenge is stark. The government estimates 9.3 million working-age adults are economically inactive, 700,000 more than before the pandemic. Long-term sickness in the UK has reached a record 2.8 million people, while one in eight young people are not in education, employment or training.
Some of Kendall’s proposals rely on previously-announced investment in the National Health Service to tackle long-term sickness. She will also announce plans to reform job centers so they have a renewed focus on skills and careers - instead of a narrow focus on monitoring and managing benefit claims.
Yet while a carrot-and-stick approach fits how Starmer and Reeves presented Labour as fiscally responsible ahead of the election to blunt Tory attacks, it also risks angering MPs sensitive to cutting back benefits — especially if jobs don’t materialize. The government has already faced fierce criticism over his refusal to end a cap on child welfare payments introduced by the Tories, and over Reeves’ decision to scrap winter energy assistance from most pensioners.
“We will get to grips with the bulging benefits bill blighting our society,” Starmer wrote in an op-ed for the Mail on Sunday newspaper. “We will crack down hard on anyone who tries to game the system, to tackle fraud so we can take cash straight from the banks of fraudsters.”
Though the welfare cuts won’t be announced until the spring, the risk is that the government faces battles on multiple fronts after a rocky start in which its poll ratings have plummeted. Both Starmer and Reeves have called for patience after campaigning on a promise of a “decade of national renewal.”
But a petition on Parliament’s website calling for another election has been signed by more than 2.3 million people, suggesting impatience is building.
“I remind myself that very many people didn’t vote Labour at the last election,” Starmer said on ITV’s This Morning program on Monday. “What my focus is on is the decisions that I have to make every day.”
--With assistance from Sabah Meddings.
(Updates with details of government’s plans from second paragraph.)
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