Keir Starmer faces £4.25bn fiscal hit after surprise reversals

Raunaq Mohammad

2nd June 2025

Written by Raunaq Mohammad

Sir Keir Starmer has blown a £4.25bn hole in his budget after retreating on cuts to disability benefits and pensioner subsidies, raising the likelihood of further tax rises and damaging his government’s credibility with investors.

The UK prime minister gave rebellious Labour MPs about £3bn worth of concessions on planned cuts to welfare spending just weeks after he reversed on cutting winter fuel payments for pensioners at a cost of £1.25bn.

Starmer, who swept to office last July in a landslide election victory has made his huge parliamentary majority a core part of his pitch to investors, arguing that the UK government has the stability and the strength to make tough decisions. Well that didn’t last long did it, with this argument being inadvertently undermined in the eyes of investors.

This now puts the prime minister in a precarious position as “These U-turns are going to weaken the PM’s ability to take difficult decisions as his authority has clearly been challenged by the Labour parliamentary party” as stated by Nicolas Trindade, a senior portfolio manager at Axa’s asset management arm,

This back and forth will also make it much more difficult for the chancellor to keep her fiscal headroom intact and will also significantly increase the likelihood of tax increases at the at the Autumn Budget.

The fiscal pressure on Starmer and Reeves may increase further, with the economy predicted to weaken after a strong first quarter. In addition to this, Labour MPs may also be inclined to push the government to scrap the two-child cap on benefits inherited from the last Conservative government, a move that would cost £3.5bn a year

The Labour government had hoped to save £4.8bn a year by cutting welfare payments but the party’s MPs have had conscious second thoughts about taking money away from vulnerable disabled people.

Starmer offered to limit cuts to Britain’s main disability benefit to new claimants after November 2026, increase health payments under a different benefit in line with inflation for existing claimants, and accelerate a £1bn package of employment support.

Starmer said he was “really pleased” that the government was able to take the bill forward. “We talked to colleagues who have made powerful representations, as a result of which we’ve got a package which I think will work.”