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Labour Faces £5-6 Billion Gap After Welfare U-Turn, Signals Possible Tax Rises
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The Labour government has acknowledged that watering down its flagship welfare reform package will leave a multibillion-pound hole in the public finances and could necessitate tax increases. Cabinet Office minister Pat McFadden said on 2 July that the climbdown, agreed after a back-bench rebellion, "will have financial consequences" for the Exchequer.
The shelved measures were expected to save roughly £5–6 billion by 2029-30. Their loss, coming on top of last month’s reversal of planned cuts to the Winter Fuel Allowance, effectively exhausts the fiscal buffer Chancellor Rachel Reeves had earmarked to keep borrowing on a downward path.
Reeves told broadcasters on 3 July that the cost of the welfare changes "will be reflected in the Budget" and declined to rule out raising taxes, while reiterating Labour’s manifesto pledge not to lift Income Tax, National Insurance or VAT for "working people." The Institute for Fiscal Studies said the U-turn makes tax rises increasingly likely if the government is to meet its self-imposed rule of reducing debt as a share of GDP.
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