Rachel Reeves has said the welfare system is “letting down taxpayers”, while she again committed to reaching 2.5% in defence spending by 2027 due to the “enormity of the situation” facing European security.
The chancellor told Sky’s political editor Beth Rigby on the Electoral Dysfunction podcast, out on Friday, that there needs to be “better value for money” for what people pay in taxes.
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It comes ahead of the spring statement on 26 March, in which Ms Reeves is expected to make billions of pounds of cuts including to the benefits bill.
The chancellor said there needs to be welfare reform because the system is “letting down taxpayers because it’s costing too much”.
“It’s letting down our economy because there’s too many people trapped on out-of-work benefits, and it’s letting down the people who are recipients of benefits because they are trapped on benefits rather than actively supported back into work,” she said.
Pressed that she has to find savings to meet her self-imposed fiscal rules, Ms Reeves said she was “not going to provide a running commentary” on what could be in the spring statement but insisted the reforms were necessary regardless of what could be in the upcoming forecast from the Office for Budget Responsibility (OBR).
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She said there are a million young people not in education, employment or training and “the majority of those people should be working”.
“Under the plans that we’re going to bring in, they will be working and crucially, they will be given support to get back to work,” she added.
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The spring statement will be in response to the latest updates from the OBR, which is required to do a forecast twice a year on the economy and public finances.
The chancellor previously committed to just one single major fiscal event each year to give stability and certainty on upcoming tax changes, unlike previous governments that typically delivered budgets in the spring and autumn.
However, the poor economic climate since her October 2024 budget is forcing her hand, with inflation hitting a 10-month high of 3% in January, a sharp rise in government bond yields, and growth has not been as high as expected.
This has eaten into the £10bn fiscal headroom Ms Reeves was previously estimated to have – a figure the Treasury wants to maintain.
Ms Reeves insisted her spring statement would not be another package of tax rises, saying the October budget “was a sort of a once in a generation, once in a parliament type budget”.
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She added that Labour committed in its manifesto not to increase income tax, VAT or national insurance and “we’re not going to renege on that”.
‘World has changed’
Elsewhere in the podcast, Ms Reeves defended the government’s decision to cut foreign aid to fund an increase in defence spending.
Labour’s manifesto committed to restoring development spending at the level of 0.7% of gross national income “as soon as fiscal circumstances allow”.
However around £6bn per year will now be taken out of the aid budget and transferred over to pay for defence.
That amounts to a reduction in aid spending from 0.5% of GDP to 0.3%.
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Ms Reeves said the decision had to be made to fund another manifesto pledge – which was to raise defence spending to 2.5% of GPD, up from the 2.3% it is at now.
“The decision was made not just to get to 2.5%, but to get to 2.5% in 2027,” she said.
“I think that was the most significant bit, really of the announcement.
“Everyone knew we were going to get to 2.5% in this parliament. That was a commitment from us in our manifesto that we would get there, but we’re actually going to get there in two years because we recognise that the world has changed the enormity of the situation.”
Listen to the full interview with Rachel Reeves on the Electoral Dysfunction podcast, out Friday at 5am.
