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Sir Keir Starmer has suffered a cabinet uprising over planned cuts to welfare and other public spending, but the prime minister insisted “tough choices” are needed and has told MPs he will not bend Britain’s fiscal rules to allow more borrowing.
Government insiders say ministers raised concern about the cuts at a cabinet meeting two days ago, most of them protesting about planned spending reductions in their own departments.
But ministers also flagged concerns about planned welfare cuts, which Starmer says are needed to reform an “indefensible” system, which he claims leaves many people trapped on benefits.
The prime minister has told colleagues he is well aware of the anger over the proposed cuts, and his spokesperson did not deny that a number of ministers made plain their concerns on Tuesday.
One government insider said a “minority” of those attending the meeting spoke out, but added there was firm support for sticking to chancellor Rachel Reeves’ fiscal rules.
“There was lots of support for the fiscal rules but not for tough choices in the policy areas of individual ministers,” one government official told the Financial Times. The ministerial unrest was first reported by Bloomberg.
Reeves is determined to push through welfare cuts, which Labour officials say could save up to £6bn a year. She has submitted the plans to the Office for Budget Responsibility.
The fiscal watchdog will have to assess how the reforms are “scored” ahead of producing final fiscal forecasts at Reeves’ Spring Statement on March 26.
Starmer has warned Labour MPs that Britain’s fiscal rules will not be relaxed to avert painful welfare cuts, in spite of growing party pressure for the UK to follow Germany in turning on the borrowing taps.
The prime minister has agreed with Reeves that Britain’s fiscal rules must be respected and any relaxation of the self-imposed restriction would spook markets and force up borrowing costs.
“The markets are still testing us,” said one senior government official. “The decisions we make are coming under considerable scrutiny.”
Germany’s decision to loosen its borrowing rules to fund defence and infrastructure projects has increased pressure on Reeves to look again at her rules, which require her to balance current spending with tax receipts by 2029-30.
Anneliese Dodds, who quit as overseas development minister last month over cuts to the aid budget, told Starmer in her resignation letter that she “expected we would collectively discuss our fiscal rules and approach to taxation, as other nations are doing”.
Reeves ordered a cut in the aid budget to fund an increase in defence spending from 2.3 per cent of GDP to 2.5 per cent in 2027. She said her fiscal rules are “non-negotiable”.
John McDonnell, former shadow chancellor, told the Financial Times the rules “have to be relaxed”. He said Reeves’ restrictions were requiring her to cut more from the welfare bill than the Conservatives had planned.
Other mainstream Labour MPs, many of whom have been invited into Downing Street in recent days to be briefed on the planned welfare cuts, say there is widespread discussion of the fiscal rules inside the party.
One said: “Cutting welfare is tough for Labour MPs, the toughest thing we’ve been asked to swallow. Talk about relaxing the fiscal rules is bubbling under and is about to break the surface.”
One ally of Starmer said that if Britain followed Germany in relaxing its fiscal rules, the subsequent rise in UK borrowing costs imposed by the markets would be punishing.
One said: “Germany has a debt-to-GDP ratio of 62 per cent while ours is about 95 per cent. There are obvious differences.”
Downing Street presentations on the welfare cuts have been led by Claire Reynolds, Starmer’s head of liaison with the Parliamentary Labour party. MPs who are usually loyal are “really, really pissed off”, said one attendee who believed Number 10 might be “softening a bit” on some of the measures.
Economists say Reeves’ plan for the public finances has been blown off-course by a combination of rising borrowing costs and slow growth, and some expect her to cut spending or raise taxes by at least £10bn in her Spring Statement.
In October she allowed herself £9.9bn of headroom against her fiscal rule but that is thought to have been wiped out. Welfare cuts and other spending reductions are being planned to provide the chancellor with a cushion against further bad news.
Nicolas Trindade, a senior portfolio manager at Axa’s investment management arm, warned Reeves “cannot keep on managing the economy with just £10bn of headroom”, adding: “It just doesn’t work and she is just going to have the same issue over and over again.”
Any move to loosen fiscal rules that were changed as recently as October would be poorly received by the market, investors said. Concerns about higher UK borrowing combined with a global bond sell-off to take UK 10-year borrowing costs to a 16-year high at 4.93 per cent in January.
At slightly less than 4.7 per cent on Thursday, they remain almost a percentage point above where they were in mid-September, and at levels comparable with those reached at the height of the market crisis following the Conservatives’ ill-fated “mini” Budget in 2022.
“The UK Treasury is caught in a bind,” said James Smith, UK economist at ING. “Higher debt interest costs mean painful spending cuts at the Spring Statement on March 26 now look inevitable. And further tax rises look increasingly likely later in the year.”