Rachel Reeves doubles down on welfare and says ministers must get a grip of broken benefits system

Rachel Reeves has doubled down on the need to reform the welfare system amid concerns from Labour MPs about expected swingeing cuts to the budget.

On a visit to Rosyth in Fife on Friday ahead of her Spring Statement later this month, the Chancellor said the benefits system was “broken” and “not working for anyone”.

Backbench Labour MPs have made it known to ministers they are concerned proposals to reform welfare will harm vulnerable people claiming benefits.

Cabinet ministers are believed to be divided over the plans and are thought to have urged the Chancellor to rethink them.

In a further blow for the Chancellor, ahead of the spring statement on 26 March, new figures on Friday showed Britain's economy shrank in January amid a sharp fall in the manufacturing sector.

Chancellor of the Exchequer Rachel Reeves during a visit Babcock in Rosyth, to talk about growing the defence sector to kickstart economic growth and bolster national security | PA

The Office for National Statistics (ONS) said the economy contracted 0.1 per cent during the month, behind expert predictions and down from a 0.4 per cent rise in December.

Most economists had forecast gross domestic product (GDP) to rise by 0.1 per cent in the first month of the year.

While Ms Reeves would not be drawn into revealing what her plans for the welfare system will entail, she was insistent that reform is needed.

She said: "We will set out our plans for welfare reform, but it is absolutely clear that the current system is not working for anyone.

"It is not working for people who need support, it's not working to get people into work so that more people can fulfil their potential, and it's not working for the taxpayer when the bill for welfare is going up by billions of pounds in the next few years.

"So, we do need to get a grip. We need to spend more on national defence, but we need to reform our public services, and we need to reform our broken welfare system."

More than half of the Cabinet has urged the Chancellor to rethink the reforms, according to Bloomberg.

A Downing Street spokesman would not be drawn into commenting on the reports, but warned the benefits system will "swallow more taxpayers' money and leave more people trapped in a life of unemployment and inactivity" if left in its current state.

He added: "That's not just bad for the economy, it's bad for people too, and that's why this Government will set out plans to overhaul the health and disability benefits system shortly so it supports those who can work to do so, whilst protecting those who can't, to put welfare spending on a more sustainable path so that we can unlock growth."

Ministers are hoping to reduce the number of working-age people claiming benefits and encourage them into work, as part of the Government's plans to grow the economy.

The number of claimants on universal credit (UC) with a health condition or disability restricting their ability to work rose by half a million in a year to 2.5 million people, the latest figures have shown.

The latest figure for claimants as of December 2024 was up from two million the previous year.

Some 1.8 million (71 per cent) were assessed as having limited capability for work and work-related activity (LCWRA).

The Government said this means the current system is "effectively abandoning" 1.8 million people "and locking them out of work indefinitely" as the LCWRA assessment means they will not get employment support or further engagement from the system after their assessment.

The Department for Work and Pensions said the number of people in this situation had almost quadrupled since the start of the pandemic when it was around 360,000 people.

The SNP urged Ms Reeves to clamp down on "soaring levels of child poverty" by introducing a UK-wide version of the Scottish child payment.

The party said the Chancellor should use her spring statement to "finally deliver the real and long-overdue action" needed to tackle poverty.

It said that should include scrapping the two-child benefit cap and abolishing the so-called bedroom tax - two policies introduced by the previous Conservative government.

SNP MP Kirsty Blackman , the party's work and pensions spokeswoman, said it was "deeply concerning to see reports that the Labour government will water down action on child poverty and only bring forward fudged proposals that won't fully scrap the two-child benefit cap".

The Prime Minister has refused to end the two-child cap but reports suggest the Chancellor could mitigate the policy for children under five.

The policy limits Universal Credit to the first two children in most circumstances.

Research from the House of Commons Library, commissioned by the SNP, found that matching the Scottish child payment UK-wide by raising the child element of Universal Credit would lift more than half a million (563,000) children out of poverty, including 40,000 in Scotland .

The payment provides £26.70 each week per child to eligible low-income families.

The call follows a warning from the Resolution Foundation that the number of children living in poverty across the UK is expected to rise to 4.6 million under the current government - the highest level on record.

But the Institute for Fiscal Studies (IFS) yesterday warned that the SNP’s plans could harm incentives to work. The IFS said mitigating the two-child cap in Scotland could see low-paid workers earn more money on welfare than if they chose to work.

The independent think tank said this could incentivise some families to work fewer hours.

Around 27,000 families in Scotland are impacted by the two-child benefit limit – a policy introduced by the previous Conservative government that limits Universal Credit to the first two children in most circumstances.