Inside Labour’s new plan to cut benefits

In his exchanges with Lord Peter Mandelson, Work and Pensions Secretary Pat McFadden gave a quote about Labour MPs’ attitude to bringing the benefits bill down that will be used to smack his party about the chops until the general election.

“Every meeting I have is ‘who can we tax in order to pay benefits to others’. They’re asking the wrong questions,” McFadden wrote of his colleagues in an exchange with the now disgraced former peer. The release of the WhatsApp messages provoked predictable outrage on the left of the Parliamentary Labour Party (PLP), even though the messages were around the same time a leaked memo showed former deputy prime minister Angela Rayner had called for tax rises on the wealthy.

But the context doesn’t matter for the welfare rebels who saw their then response to the Government trying to retrofit £5bn of savings by cutting payments to disabled people as nothing other than a moral objection to penalising the vulnerable. No wonder Labour left-winger John McDonnell called for McFadden to consider resigning, even though any outrage was muted in other parts of the party.

There are two interconnected strands to the ballooning welfare bill. One is the structural problems facing young people classed as Neets (Not in Education, Employment, or Training), whose problems were eloquently set out in Alan Milburn’s interim report last week. He warned that without urgent action, the number could continue rising from one in eight young people who are classified as Neet to one in six within five years, or 1.25 million young people.

The other element is ensuring personal independence payments are “fair and fit for the future” to support disabled people with the extra costs of their conditions, while reflecting a rising trend in mental ill-health claims, which minister for Social Security and Disability Stephen Timms is looking at.

Timms will publish his interim findings before Parliament breaks up for the summer and both men are expected to submit their final reports towards the end of the year, with fresh legislation expected in 2027. Ministers are considering separating the two issues to avoid a fresh rebellion from Labour backbenchers, The i Paper understands.

McFadden is already discussing the issues with his Labour colleagues, including Louise Haigh from the soft-left Tribune caucus and a key ally of Greater Manchester Mayor Andy Burnham. McFadden and Milburn spoke to around 50 Labour MPs on Monday night to press the case for Neets reform and were well-received, a Labour source said. “The conversations on welfare reform are much better since Pat has been in charge,” one Labour MP who rebelled last year told The i Paper. “Reducing the number of young people on benefits is crucial. He’s working the PLP and making good arguments. The Milburn Review has been well handled both by Pat and Alan. Great pitch rolling for a change.”

But one government insider appeared fatalistic about whether the PLP will accept changes at all, although they pointed to some changes of heart.

“You have to control what we can control. It’ll be up to MPs whether they accept that case or not,” for reforming welfare, a government source told The i Paper. “It’s a completely different argument than just saying we’ve got to save X amount from the welfare bill, whether that’s £5bn and then I’m going to retrofit a policy on to it and the policy – because it’s completely guided by saving whatever the sum is – is just about cuts and entitlements.”

In the meantime, McFadden is pushing ahead with ideas to end what he calls the “stickiness” of young people remaining on benefits. Once health-related inactivity begins, it becomes “sticky.” Almost 80 per cent of individuals who fell into this category between 2017 and 2019 were still Neet more than two years later.

McFadden will visit the Netherlands next week to see how their approach keeps young people off benefits. While the country has similar levels of poor mental health in young people, its solution is based around a focus on vocational education and a welfare safety net prioritising engagement. Dutch-style financial incentives that make it worthwhile for businesses to hire young workers have already been adopted in the UK, with a £3,000 cash incentive for employers who take on Neets announced last week.

McFadden has also appointed former Marks & Spencer chief executive Marc Bolland as an advisor. Bolland, a Dutchman, is the founder and chairman of the charity Movement to Work, which has worked with the Government to help over 200,000 unemployed young people into work.

“The discussion of welfare issues probably revolves too much around monthly income and not around story of your life,” the government source added. “The story of your life is ‘you stay on this for a long time, we can keep your body and soul together, we can pay the cheque’ but that is not an ambitious enough goal for young people in relation to what the Government and the state should be offering them.”

If, as Labour strategists expect, Burnham wins the Makerfield by-election, he will be well aware of the constraints on benefits spending. As Mayor of Greater Manchester, he oversees money devolved to his region to tackle worklessness. This putative prime minister will need to tackle welfare spending head-on. But even if he can rely on a greater deal of goodwill from the PLP than Starmer, the reforms Milburn has already suggested also require upfront spending.

Rejigging secondary education to follow the Dutch model would mean boosting vocational secondary education and incentivising employers to provide work-based learning or apprenticeships. While in the UK, firms complain that entry-level workers are too expensive with an increase in the minimum wage and a hike in employers’ national insurance contributions, the Netherlands has used fiscal policy to effectively subsidise youth employment.

McFadden has already gratefully accepted an additional £2.5bn into the Youth Guarantee and Growth and Skills Levy over the next three years from the Treasury. Burnham may take a dim view of McFadden’s closeness to Mandelson, using the release of the files on Monday to condemn the Westminster “culture” which allowed his appointment as UK ambassador to Washington.

If Mandelson has done Labour a favour, it’s to crystallise that welfare reform cannot be deferred again. But to secure any more upfront spending to make any deal palatable to Labour MPs, whoever is work and pensions secretary next year will have a fresh millstone. They’ll have that phrase “who can we tax to spend benefits on others?” hurled back at them.