Reeves urged to consider welfare cuts to boost fiscal credibility

Published: 16 October 2025. The English Chronicle Desk. The English Chronicle Online.

Britain’s leading tax and spending analysts have called on the Chancellor Rachel Reeves to seriously consider implementing significant welfare cuts in her upcoming budget, arguing that decisive action is necessary to maintain credibility with financial markets and restore investor confidence. The Institute for Fiscal Studies (IFS), widely regarded as one of the UK’s most authoritative economic think tanks, warned that the chancellor could be forced to address a potential £22 billion shortfall in government finances if a balanced and credible approach is not taken.

The call from the IFS comes in the wake of Reeves giving her clearest hint yet that spending reductions could be under consideration. With borrowing costs rising and productivity growth slowing, the think tank stressed that the chancellor should not shy away from making tough fiscal choices, even if they involve politically sensitive areas such as welfare. Officials and analysts alike suggest that inaction—or half-hearted measures—could fuel uncertainty and risk undermining confidence in the government’s ability to manage public finances effectively.

In its report, the IFS outlined a series of options that the chancellor could explore. These include scrapping the pensions triple lock, pursuing further cuts to health-related and disability benefits, and restraining the growth of spending on special educational needs. While such steps would likely generate significant savings, they could also reignite tensions within the Labour Party, especially among backbench MPs who opposed earlier welfare reductions and forced a high-profile government U-turn earlier this year.

Ben Zaranko, associate director at the IFS, emphasised that any proposed welfare reforms must be presented as genuine improvements for individuals, rather than simply mechanisms to achieve immediate savings. “Trying to do it to chase particular savings isn’t a recipe for success,” Zaranko said, stressing that the framing and communication of reforms would be critical in gaining public and political support.

The IFS’s recommendations were released as part of its annual “green budget” report, a detailed assessment of the UK’s fiscal position prior to the chancellor’s forthcoming speech to the House of Commons. According to the think tank, Reeves may need to raise at least £22 billion through a combination of tax and spending measures. This figure is intended to restore the £9.9 billion headroom she left herself at the spring statement, which aligns with her main fiscal rule requiring that day-to-day spending be matched by revenues by the end of the parliamentary term.

Analysts warn that without credible action, the chancellor risks a repeat of the uncertainty that has plagued UK financial markets in recent months. Rising borrowing costs, coupled with weaker productivity forecasts, have placed further pressure on the government’s fiscal position. The IFS suggested that merely addressing the minimum shortfall would leave the country vulnerable to speculation about whether future fiscal rules will be met, creating a cycle of repeated market anxiety.

Helen Miller, director of the IFS, highlighted the broader economic implications of indecision. “That wouldn’t be costless – but nor is limping from one forecast to the next under constant speculation that policy will be tightened again. Persistent uncertainty is damaging to the economic outlook,” she said. According to Miller, a more ambitious approach would provide a larger buffer against potential economic shocks and improve the credibility of the government’s fiscal strategy.

The IFS report was prepared alongside input from Barclays, which echoed the importance of demonstrating political will and fiscal discipline. Barclays highlighted that credible welfare reforms would send a strong signal to City investors that the government can take tough decisions, thereby enhancing confidence in the UK’s financial management. Moyeen Islam, a fixed-income strategist at Barclays, said, “Welfare is totemic. It’s totemic for the market because it shows a willingness to do hard things and burn a little bit of political capital. If you can’t do this with a 150 MP majority, or whatever it is, then when will you do it?”

Islam further warned that a “Scrabble bag” approach—implementing a collection of small, incremental measures—would likely fail to convince investors of the government’s credibility. He emphasised that any measures must be both deliverable and clearly presented to avoid fuelling negative market reactions. “If you cobble together a hodgepodge of measures and they’re not viewed as deliverable or credible, then you are entering into a more adverse market scenario,” he said.

The Treasury, for its part, maintained a cautious stance. A spokesperson said: “We won’t comment on speculation. The chancellor’s non-negotiable fiscal rules provide the stability needed to help keep interest rates low while also prioritising investment to support long-term growth.” This response reflects the government’s determination to reassure both the public and financial markets that fiscal discipline will remain central to budgetary planning.

Beyond the immediate fiscal context, the debate over welfare cuts raises broader social and political considerations. Labour backbenchers may resist measures that are perceived as disproportionately affecting vulnerable groups, creating tension between economic necessity and political feasibility. Analysts argue that the chancellor will need to carefully balance these competing pressures, ensuring that reforms are framed as fair, transparent, and focused on improving long-term outcomes rather than simply reducing expenditure.

Public opinion is likely to play a key role in shaping the scope and presentation of any welfare adjustments. Past attempts to curb welfare spending have generated significant backlash, underscoring the sensitivity of such policies. By focusing on outcomes and clearly communicating the rationale for changes, Reeves could mitigate potential political risks while still achieving meaningful fiscal savings.

The IFS report also notes that credibility in the eyes of financial markets is crucial for broader economic stability. Persistent doubts about the government’s ability to manage public finances could raise borrowing costs further and dampen investor confidence, complicating efforts to stimulate growth. Conversely, a well-communicated and carefully implemented fiscal package could reinforce market trust, supporting both the chancellor’s short-term objectives and long-term economic resilience.

As Reeves prepares for her November budget, the challenge is clear: she must navigate a complex landscape of political constraints, economic pressures, and public expectations. Decisions on welfare spending, tax policy, and broader fiscal measures will be closely scrutinised by both domestic stakeholders and international investors. The choices made in the coming weeks may set the tone for the government’s economic management for years to come, with implications for public confidence, financial stability, and the UK’s growth trajectory.

In conclusion, the IFS’s recommendations highlight the need for decisive, credible action to address fiscal pressures. Whether through welfare reforms, tax adjustments, or a combination of measures, the chancellor faces a pivotal moment in shaping the economic outlook and reinforcing the government’s credibility. As debates intensify ahead of the budget, all eyes will be on Reeves to see whether bold choices are made or whether incremental adjustments dominate the approach—a decision that could define both the political and financial landscape of the UK in 2025 and beyond.