The coming battle over the cut in universal credit is a big test for Labour

Jonathan Reynolds, the shadow work and pensions secretary, has set out how he intends to change the welfare system, writes John Rentoul

Reynolds would adjust rules to make the state benefit more generous (Bruce Adams/ANL/Shutterstock)

Something unusual happened on Monday. The Labour Party announced a new policy. Jonathan Reynolds, the shadow work and pensions secretary, delivered a speech in which he set out what a Labour government would do with universal credit, now the main benefit for the unemployed and those in low-paid work. According to the House of Commons library, 62 per cent of households on benefits in Great Britain are now on universal credit.

This is the first new promise of higher public spending since Labour rather quietly pledged an extra £15bn to pay for post-pandemic schools catch-up. This was recommended by Kevan Collins, who resigned as the government’s education recovery adviser when Boris Johnson and Rishi Sunak refused to accept his proposals in full.

Until this week, Labour had two policies on universal credit. One was to abolish it, mainly because David Cameron and George Osborne tried to use the switch to universal credit as a way of cutting the welfare budget. The other policy was to argue for the temporary £20-a-week increase in universal credit to continue, rather than being cut as planned in October.

Now Reynolds has set out a more detailed policy for the long term. He is still talking about “replacing” universal credit, but the proposals in his speech amount to no more than adjusting its rules to make it more generous.

This is positioning the Labour Party for what happens after the £20-a-week uplift expires. It seems unlikely that there would be enough Conservative MPs prepared to defy their government to vote to keep the higher rate. In the end, there were only 25 Tory rebels over the cut to foreign aid last month, when they needed 42 to defeat the government.

So what should Labour do then? Reynolds is clear that Labour would not argue simply to restore the £20-a-week top-up, which was a crude emergency measure in any case, but would reform the system instead.

One of the perennial problems of any welfare system is the “poverty trap” by which claimants are discouraged from earning more because they lose benefits. Universal credit, by combining and simplifying benefits, was supposed to ease this problem, but it still results in claimants facing the equivalent of tax rates higher than 70 per cent on additional earnings. Reynolds’s plan is to change the rate at which universal credit is withdrawn to reduce that disincentive effect.

Naturally, that would cost money, because it means paying universal credit to low-paid workers higher up the earnings scale. But Reynolds argues that this would mean that “those who need help from the social security system are not punished for wanting to earn more and contribute more”.

He is likely to come under pressure from his own party to promise to raise the basic rate of universal credit as well, especially when some of the hardship caused by the £20-a-week cut and the restoration of sanctions becomes evident.

However, Reynolds will resist the pressure, with the support of the Labour leadership. Indeed, he implied that his plans to make universal credit more generous wouldn’t necessarily cost more, because Labour’s policy of a higher minimum wage and full employment rights from day one would mean that fewer people would need to rely on universal credit in the first place.

Anneliese Dodds, the former shadow chancellor now in charge of policy as chair of the Labour Party, emphasised the need for absolute fiscal discipline in an interview with the New Statesman last week. “The absolutely fundamental thing for a shadow chancellor – I mean, Rachel [Reeves] is doing this very effectively – is to be improving that economic credibility.” Dodds warned against “short-term, attention-grabbing announcements”. In a message presumably intended on behalf of Keir Starmer for the whole shadow cabinet, she said: “I wouldn’t advise anybody to adopt that approach. I don’t think that would be sensible at all.”

Reynolds is going to be fighting the coming battle over universal credit on two fronts: one against the government to try to delay the cut, but one in his own party over how much to spend on its “replacement”. Much of the Labour Party, having tasted the joys of promising to spend more or less whatever they wanted in the manifestos of 2017 and 2019, will find it hard to accept the conventional rules of fiscal responsibility again.

But the battle over universal credit is much more than a test for Reynolds, one of the promising members of the shadow cabinet. It is a test for Starmer, Reeves and Dodds as well. Can they win the argument for “economic credibility” with their own party?