What is going on with Labour?

This should have been a week of unity and celebration for Labour - a year on from their thumping election victory which gave the Party an apparently unassailable Commons majority and should have guaranteed five years of political stability and serenity. Instead, it became the Week from Hell – a Party united only in its frustrations. And all over something that should have been utterly predictable: the views of Labour backbenchers over the Welfare Bill.

The rebellion had been growing for some time. The PM minister was warned months ago by his own whips that the scale of dissent over his welfare reforms was dangerously out of control. Warnings from disability charities and campaigners were ignored. MPs’ anger was rising. Three weeks ago, there were 80 rebels. Two weeks ago that number had climbed to 106 and then 126. A Whip resigned. Alarm bells should have been ringing in Number 10. There was still time to make changes. The PM and Chancellor should have been hosting lunches, dinners, receptions with their backbenchers to persuade them, win them over, listen to their concerns, show flexibility. Instead, the PM at the NATO Summit last week haughtily dismissed the rebels (by that stage over 25% of his MPs) as ‘noises off’. As political miscalculations go, it was pretty glaring – his comment serving only to put more fire in their bellies and increase complaints about his inflexible political style. The leadership and the Parliamentary Labour Party now appear to have never been further apart: the one focused on budget and fiscal restraint (apparently oblivious to the social cost); the other on social justice (apparently oblivious to the financial cost).

Political Misjudgement, or Tone Deafness?

Sir Keir is known amongst his friends as a ‘decent, honest, hard-working man’. He is also known to be politically ruthless.

With his government in deep trouble, hemmed in by the national debt, unable to raise taxes because of (unwise) electoral pledges and constrained by ’iron-clad’ fiscal rules (which require day-to-day spending to be matched by receipts within five years), the PM and his Chancellor were faced with an unenviable choice - find money from somewhere (the welfare bill) to rebuild their fiscal headroom after a deterioration in the public finances; or face the uncomfortable and politically-fraught reality of tax-rises in the Autumn Budget.

He and his Chancellor turned to the cost of welfare – which, to be fair, is colossal and rising (spending on health and disability benefits for working-age adults is set to reach £75.7 billion per year by 2029/30) – to try and ease people off state handouts and back into work where they would earn money, pay taxes and cease to be a net cost to the Exchequer. The plan looked good on paper – good for economic growth and for reducing government administration and expenditure at the same time.

But welfare is a touchstone issue for Labour – care for the most vulnerable in society is a core value of the Labour movement. MPs were already bruised by the decision to cut winter fuel allowances for all pensioners – a decision taken, apparently with limited (if any) consultation and without an impact assessment. They were upset by the refusal of the Government to row back on the Tories’ two-child benefit cap. And it was clear from a long way off that they were deeply unhappy about the proposals for benefit reform.

The size of the potential rebellion finally dawned on the Government and in a series of last-ditch and increasingly desperate concessions, it gutted its own Bill (possibly actually adding to the cost of welfare in the process), but still was unable to prevent 49 more than 10% of the PLP voting against the Bill.

The humiliation for the Government was crushing. The blame game began immediately. Whilst some pointed the finger at Morgan McSweeney (Starmer’s election-winning guru), others turned their fire on the Chancellor: after all the country’s finances are her responsibility (and in a nice, political twist, McSweeney just happens to be the name that many are murmuring as a possible replacement for Reeves…).

And then the Tears

As the PM battled PMQs at the Dispatch Box the following day, his Chancellor, sitting on the front bench behind him, dissolved into tears. At that point, the conclusion many reached was that the PM had demonstrated his ruthless streak and had jettisoned a Chancellor whose authority and therefore utility and time in Government, had seeped away. The PM had decided the time was right for a Front Bench Reshuffle and Reeves would be its first casualty.

There were some deeply unedifying scenes as the Leader of the Opposition, Kemi Badenoch abandoned all pretence at empathy and humanity, instead attempting to make political capital out of Rachel Reeves’ evident distress. And the PM did not help matters when he initially swerved Badenoch’s request that he endorse his Chancellor.

When the repercussions of that omission became clear, the Cabinet finally (and a bit too late) closed ranks behind Reeves, with the PM stating clearly “The chancellor is going nowhere.” The Chancellor then made an unscheduled appearance at the launch of the NHS 10 year plan (yes…,another one…), the next day, smilingly flanked by the PM and the Health Secretary.

And the Consequences

Economic and Fiscal

But the damage is done. The Government was counting on savings from welfare reform to help balance the books. With the cost-saving elements of the legislation neutered, the Government will have to find £4.3 billion from somewhere else. With all non-protected Government departments already facing steep cuts, those savings can only come from tax rises if the fiscal rules are not to be broken.

The adverse market reaction to the possibility of Reeves leaving office (which was a significantly stronger reaction than to that which met the actual U-turn on welfare reform) demonstrated the importance of maintaining the credibility of those fiscal rules. As rumours swirled of her imminent demise, the market turmoil began, with the Pound tumbling against the Dollar and the Euro and the yield on 10-year UK government bonds rising by 0.2% to 4.7 % (the daily biggest jump since Liz Truss was in No 10). Although gilts fell back after the PM gave his backing to Reeves, they remained higher than before PMQs and indicative of an unresolved concern at the state of the UK’s public finances.

The Government has not yet said how it plans to fill the fiscal hole left by the welfare U-turn. But commentators are pointing to the fiasco as evidence that the government risks losing the market’s confidence in its ability to exert control over public spending, noting that last October’s budget increased 2025-26 public spending by nearly £100bn.

Political

Tories still utter Margaret Thatcher’s ‘The Lady is not for turning’ comment in almost reverential tones. U-Turns are political banana skins: too many of them and the government appears indecisive; but a bull-headed refusal to change direction despite changing circumstances can be just as damaging. At the moment, the Labour Government appears to be firmly in the former camp with recent U-turns on winter fuel and grooming gangs now joined by this one on benefit reform. Labour MPs backbenchers have now felt their power: under pressure, the Government will climb down, giving them succour for future battles. Whilst the Government will be messaging the markets and the PLP that that order can be reasserted and tough times are coming, both sides will feel that the Government is now leaking authority.

Perversely, this week’s events may have strengthened Reeves’ position. The market reaction made clear that Reeves is viewed as probably the most market-friendly chancellor Labour could field and her replacement would be a softer-left Chancellor, content to change fiscal rules, bringing more debt and instability. On the other hand, the PM’s reputation and authority has taken a pounding and the trust of his MPs (and possibly front-bench colleagues) is wavering. I first reported a month ago that members of the Labour Party were considering a future without Starmer as the leader. The ignominious retreat from welfare reform has triggered doubts inside and outside Westminster about the political judgment of the UK prime minister and some of his closest allies. Those rumours are now being openly reported (including in Politico today).

But there is a deeper problem for the government. Even if Reeves or the PM were to be forced out, the fiscal position of the UK remains the same and any new PM or Chancellor would be confronted by the same set of insoluble problems. At some point, the market’s concerns about the UK’s ability to meet its debt commitments will raise its head again.

And for Labour MPs, the question is how many times they can fire the shots of rebellion. Absence of the money from welfare reform will make other policies for which backbenchers are clamouring (such as scrapping the two-child cap on benefit payments) much more difficult. As Pat McFadden, the Cabinet Office minister, said “you can’t spend the same money twice, so more money spent on [the welfare bill] means less for some other purpose,”

Conclusion

It is a shame that Labour so badly mis-managed the welfare reform package, as it has distracted from the many good things that the Government has delivered over the past months. The tariff deal with the US, the trade deals with the EU and India, the Strategic Defence Review, the Industrial Strategy, the Spending Review, The Infrastructure and Planning Bill all suggested a government (finally) getting to grips with its agenda and beginning to make some of the political rain. And, just as gilts fell back after the PM’s supportive statement, so too did Sterling make up lost ground on the foreign exchange markets, partly in response to the release of business survey data that showed Britain’s service sector recording its fastest rate of growth in 10 months.

However, political reality is what it is. And the unhappy coincidence in the timing of the welfare revolt and the first-year anniversary of Labour’s electoral victory exposes some uncomfortable truths. Labour has managed to squander the support and goodwill of last year’s election victory spectacularly fast and decisively. Just one year in, we should not be asking is there anything that Labour can do to turn the its ship about in the time that remains before the next election. After all, as they say, a week is a long time in politics: so four years feels like an eternity. But once a political party loses momentum and public trust, it is very difficult to turn the tide and Labour’s support is languishing at 23%.

Maybe the real handicap that Starmer faces is not the difficult backdrop – the economic inheritance, war in Europe, the Trump counter-revolution, global migration pressures and seemingly embedded economic stagnation in the UK – but the absence of an attractive, compelling and holistic vision: it is as if Labour campaigned for power, but forgot to plan for government. Perhaps Starmer does have a vision and knows where he wants to get to. If he does, his failure is in not having communicated it.

That absence of communication has converted the one-year anniversary from a party into a mutiny – for it is not just the backbenchers who are angry, many Cabinet members are equally furious that the rebels have caused the government’s authority to collapse, warning that the rebels’ welfare reform victory may prove to be pyrrhic as the government is forced to cut deeper elsewhere to get public spending under control and maintain the confidence of the markets.

Keir Starmer was ruthless in ousting the hard-left from the leadership of the Labour Party. He cast out those who did not share his determination to get the Party elected and were, perhaps, content to shout from the sidelines. But in government, he seems to have lost that ruthless edge and now appears to no longer be strong enough to resist the natural pull of his Party towards the left. He is the leader, the PM and if he cannot articulate what this Labour Government’s overarching purpose is that persuades MPs to get behind the difficult decisions, then perhaps it is not Reeves, but Starmer who will be the first to be defenestrated (and for all the wrong reasons) by a Labour Party which seems incapable of recognising that being in government entails taking difficult decisions and that the current difficult economic and geopolitical situation means that those decisions will only come thicker and faster in the future.