The credibility of Prime Minister Keir Starmer and the United Kingdom‘s fiscal situation were further undermined this week when Starmer abandoned reforms to the country’s bloated welfare system. The minimal reforms, spearheaded by Chancellor Rachel Reeves (the U.K.’s more powerful equivalent of the treasury secretary), were designed to reduce the deficit by $7 billion a year by 2030. The reforms centered on strengthened eligibility safeguards for those receiving generous incapacity benefits. The U.K. needs spending savings because its 2024-2025 budget deficit is predicted to come in at $187 billion.
Unfortunately, to borrow from British slang, Starmer bottled it.
Following a rebellion by left-wing members of Parliament in his Labour Party, Starmer included only welfare reform changes that will actually increase the deficit by around $50 million! Starmer could have stared down the rebels and secured passage of the legislation. He could have worked with the Conservative Party opposition to better welfare reforms and greater savings. He knows full well that the U.K.’s welfare system is utterly unaffordable. Things will get even worse as the population continues to age. In turn, these cuts and far greater ones are needed if the U.K. is to regain economic competitiveness and fiscal credibility.
Instead, Starmer’s weak-kneed submission to the Labour left-wing is becoming the key marker of his premiership. In May, Starmer abandoned yet another cost-saving measure when he reversed up to $2 billion in cuts to payments helping those on the U.K.’s equivalent of Social Security pay for winter heating. Recognizing a trend here, Starmer’s latest surrender has sent the U.K. financial markets into panic mode. Fiscal credibility appears ever more distant.
After all, Starmer and Reeves had already introduced a tax-and-spend budget earlier this year. It delivered a staggering $91 billion in annual spending increases and big Social Security tax hikes. The budget means that U.K. taxes stand at the highest percentage of GDP for decades. Indeed, by 2027/2028, the U.K. percentage of GDP tax rates is forecast to be at its highest level since 1948. Recall that 1948 was just three years after the end of the Second World War, which devastated the U.K. economy (rationing was still in place until 1954).
The financial markets, one of the few remaining crown jewels of the U.K. economy, are unhappy.
Following Starmer’s unsure appearance in Parliament on Wednesday, and the sight of Reeves crying behind him, Treasury yields (costs on 10-year government borrowing) shot higher, and the Sterling currency fell in value. These reactions are understandable. In 2024-2025, even excluding the free health service and government-provided social care system, welfare spending accounted for 25% of the total government budget. With the U.K.’s debt-to-GDP ratio approaching 100%, and economic growth anemic for years, the government is now likely to pursue new tax increases.
All of this will bleed into a growing political discontent. True, there remain very significant U.K. voter concerns over immigration and the costs that immigration is seen to accrue in terms of demand on free services such as healthcare, housing, and other benefits. But there is also a quieter but growing anger that while some sit idle “on benefits” watching daytime television, others are working ever harder to scrounge together just enough money for perhaps one annual vacation. Work no longer seems to pay.
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In turn, considering Starmer’s weakness, political change is almost certainly coming before the next election in August 2029. Conservative Party opposition leader Kemi Badenoch has thus far failed to capitalize on Starmer’s failures.
If she keeps struggling to offer a powerful alternative, one like the dramatic shake-up offered by the 20th century’s second-best prime minister, Margaret Thatcher, Nigel Farage’s populist Reform party seems set to triumph.
