As I reported last night, the major announcement in Ed Balls's speech on the economy today is that Labour would remove the winter fuel allowance from the wealthiest 5 per cent of pensioners. The policy is intended as an example of the "iron discipline" on spending that the shadow chancellor would pursue in office and is designed to exploit the division between the Tories and the Lib Dems on this issue. But as spending cuts go, it's small beer. The move will save just £100m a year (less than half a per cent of the £207bn welfare bill), making it almost entirely symbolic. "Labour have brought a pea-shooter to a bazooka fight", quipped Conservative Voice this morning.
But that shouldn't detract from the political significance of the decision. As recently as January, Ed Miliband defended universal benefits (including the WFA) as part of the "bedrock of our society" but with his support for means-testing winter fuel payments, the Labour leader has dramatically changed tack. While shadow Treasury minister Chris Leslie insisted on the Today programme this morning that Labour had no plans to remove other benefits such as free TV licences and free bus passes from wealthy pensioners, the decision to break with universalism will make it easier to justify doing so in the future. It is also a signal that a Labour government would not prioritise the reintroduction of universal child benefit, removed by the coalition from those earning £50,000 or more earlier this year.
Balls has long acknowledged that he won't be able to reverse all (or any) of the cuts imposed by the current government (to the fury of the left), but he's had much less to say about the further cuts that Labour would almost certainly have to make in office. Based on the most recent forecasts from the Office for Budget Responsibility, the party will inherit a deficit of £108bn, or 5.9 per cent, the largest of any western nation. While Labour is likely to opt for a more even split between tax rises and cuts than Osborne (who has adopted an 80:20 ratio in favour of cuts), the burden of austerity will still fall on government spending. For that reason, the most significant passage in Balls's speech today is this:
[T]his is the hard reality. The last Labour government was able to plan its 1997 manifesto on the basis of rising departmental spending in the first years after the election. The next Labour government will have to plan on the basis of falling departmental spending. Ed Miliband and I know that, and my shadow cabinet colleagues know that too.
With the election less than two years away, Balls is gradually waking the left up to the grim truth that I mentioned earlier: not only will Labour be unable to reverse the coalition's cuts, it will have to make its own. Means-testing the winter fuel allowance might seem bad, but much worse is to come.
While emphasising the need for fiscal responsibility, Balls is rightly continuing to make the case for stimulus now. In his speech, he will call for Osborne to bring forward the capital spending increase promised after 2015 in order to boost growth and employment. Were the Chancellor to follow his advice, Labour's economic inheritance would become less grim. But, to put it mildly, recent history suggests that he is unlikely to do so. With this in mind, Balls has embarked on a gigantic softening-up exercise. And the battles to come will make today's skirmish look like a tea party.