Keir Starmer has been forced to defend his chancellor after a day in which the bitter recriminations over Labour’s welfare bill fiasco appeared to leave Rachel Reeves in tears and the markets in turmoil.
Ministers said there would be long-lasting implications for the government’s spending priorities after it was forced to abandon the central plank of its welfare changes to prevent a damaging defeat by rebel MPs.
An already under-pressure Reeves has been criticised for her political misjudgment in trying to force through cuts in the face of deep backbench unhappiness. As a result of the U-turn, she now has to fill a £5bn gap in the public finances with taxes rises or cuts elsewhere.
After the chancellor was seen in tears at prime minister’s questions, Downing Street moved quickly to insist she would stay in post and had not offered her resignation. “The chancellor is going nowhere,” a spokesperson said.
But borrowing costs rose at the sharpest rate since Donald Trump’s tariff plans unsettled financial markets in April, while the pound fell against the dollar and the euro, settling only once No 10 had said Reeves would stay.
Pat McFadden, the Cabinet Office minister, said on Wednesday morning that there would be tough choices to be made as a result of the welfare bill row. “There’s definitely a cost to what was announced yesterday, and you can’t spend the same money twice, so more money spent on that means less for some other purpose,” he said.
Hours later, Reeves wiped away tears while sitting on the government frontbench in the Commons after Starmer refused to say she would keep her job. In a heated exchange, Kemi Badenoch, the Conservative leader, suggested Labour MPs had said Reeves was “toast”.
Reeves had appeared upset even before entering the chamber, where she had a brief altercation with Lindsay Hoyle, the Commons speaker, over potential breaches of parliamentary convention during Treasury questions on Tuesday. One witness said the chancellor told him “I’m just under so much pressure” before taking her seat.
During the 30 minutes of PMQs, Badenoch said the chancellor looked “absolutely miserable” and described her as a “human shield” for what she said was No 10’s incompetence. Reeves’s sister, Ellie, also an MP, took her hand as they left the Commons.
Afterwards, Downing Street said there would be no reshuffle. “The chancellor has the prime minister’s full backing. He has said it plenty of times. They are focused entirely on delivering for working people,” a spokesperson said.
A spokesperson for Reeves said: “It’s a personal matter, which – as you would expect – we are not going to get into”.
The Guardian understands that the prime minister spoke with the chancellor later on Wednesday afternoon.
An ally of the prime minister suggested that MPs needed to stay calm and recognise that government would regularly throw up difficult moments. They added: “Who hasn’t cried at work? Obviously it’s not ideal but I think we all need to take a breath and calm down.”
While economists have focused on the need for the chancellor to raise taxes at the budget, Treasury sources have warned there would now be implications for spending priorities, including ones popular with Labour MPs such as the £3.5bn cost of scrapping the two-child cap on benefit payments.
“We’re not going to bluff this, we’re not going to hide it. We’re going to be clear there is a financial cost to this,” said one ally of Reeves. “Labour MPs need to understand that. Of course, tax is one of the levers we could have to pull. We’re not going to duck that.
“Those Labour MPs and charities and others who want the two-child limit lifted – how are you going to pay for it now? Labour MPs made a choice last night and the government accepted that choice, but we are going to be honest that that choice comes at cost, because it does.”
However, one cabinet minister said that while it would now be harder to meet the financial cost of scrapping the two-child benefit cap, the scale of the Labour rebellion over welfare suggested there might be a political imperative to do so.
“We can’t go into the next election without child poverty coming down, and the cap is the most cost-effective and efficient way to do that,” they said.
Meanwhile, Treasury insiders ruled out further changes to the fiscal rules. “That means more debt interest, taxpayers’ money going to hedge funds. Is that a progressive thing?” one said.
No definitive plans are yet in motion for how to fill the hole left by the welfare U-turn. A government source said it would depend on future economic growth, as well as oil prices and receipts that the Treasury receives from its clampdown on tax evasion.
The incoming director of the Institute for Fiscal Studies, Helen Miller, said: “Since departmental spending plans are now effectively locked in, and the government has already had to row back on planned cuts to pensioner benefits and working-age benefits, tax rises would look increasingly likely. This will doubtless intensify the speculation over the summer about which taxes may rise and by how much.”
Starmer declined to rule out tax rises this year. When pushed by Badenoch, he said: “No prime minister or chancellor ever stands at the dispatch box and writes budgets in the future.”
The second reading of the government’s welfare bill passed its first Commons test only after a central element – changes to personal independence payments – was removed on Tuesday. The bill passed with 49 Labour MPs rebelling, more than three times bigger than the government’s previous biggest rebellion.