Tories go on the attack after Balls says Labour's welfare cap would include pensions

The shadow chancellor's latest display of fiscal responsibility is a major political gamble.

When Ed Miliband announced that Labour would introduce a cap on structural welfare spending, the assumption was that it would not include spending on pensioners. But on The Sunday Politics, Ed Balls revealed that the cap would include this area. He said: "George Osborne is going to announce his cap in two weeks' time. I don't know whether he will include pensioner spending or exclude it. At the moment our plan is to include it."

This is sensible policy; pensioners currently account for 42 per cent (£85bn) of all welfare spending, a total that will rise significantly as the population ages and as the economy recovers (reducing cyclical benefit spending). If Balls and Miliband are serious about reducing the social security bill, they cannot afford to exclude them from the cap.

But the politics are difficult for Labour. The Tories, who have previously signalled that the state pension will not be included in George Osborne's cap on annually managed expenditure, will now challenge Balls and Miliband to say how they would reduce spending on the elderly. Would they abandon the coalition's commitment to "triple lock" the state pension, so that it rises by the rate of inflation, average earnings or 2.5 per cent (whichever is highest)? The Tory Treasury Twitter account has already gone on the attack.

On the programme, Balls refused to rule out cutting spending on pensioners in order to avoid breaching the cap but also said that, while means-testing the winter fuel allowance (which would save just £100m), Labour would protect other universal benefits such as free bus passes, free prescriptions and free TV licences (the administrative costs of means-testing the latter would outweigh the savings, Balls suggested). But unless Labour is willing to make reductions elsewhere, the Tories will dismiss the cap as meaningless, while highlighting the £21bn of cuts they have announced to working age benefits.

Since the over-65s are more likely to vote than any other age group (76 per cent did in 2010 compared to 65 per cent of the total population), the Tories clearly believe that there are few votes to be won in running on a platform of lower spending on the elderly. But expect Cameron to now come under pressure from fiscal conservatives to match Labour's direction of travel on pensioner benefits.

Update: Unsurprisingly, Labour has quickly rebutted the Tory line that it "would cut pensions", but has said it would be "peverse" to exclude spending on pensioners from the cap. At present, however, it can only point to increases in the retirement age and means-testing the winter fuel allowance as examples of how it would restrain spending. A source told me:

Labour supports the triple lock on the state pension. But as Ed Balls said, it would be perverse to exclude overall spending on pensioners and the impact of an ageing society from any sensible and long-term fiscal plan to monitor and control structural social security spending. That's why we have supported increases in the retirement age as people live longer and why we have also said we would not pay the winter allowance to the richest 5 per cent of pensioners. We will look at the details of the government's cap when it is announced in the spending review as we develop the details of our own.

Ed Miliband and Ed Balls at last year's Labour conference in Manchester. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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What type of Brexit did we vote for? 150,000 Conservative members will decide

As Michael Gove launches his leadership bid, what Leave looks like will be decided by Conservative activists.

Why did 17 million people vote to the leave the European Union, and what did they want? That’s the question that will shape the direction of British politics and economics for the next half-century, perhaps longer.

Vote Leave triumphed in part because they fought a campaign that combined ruthless precision about what the European Union would do – the illusory £350m a week that could be clawed back with a Brexit vote, the imagined 75 million Turks who would rock up to Britain in the days after a Remain vote – with calculated ambiguity about what exit would look like.

Now that ambiguity will be clarified – by just 150,000 people.

 That’s part of why the initial Brexit losses on the stock market have been clawed back – there is still some expectation that we may end up with a more diluted version of a Leave vote than the version offered by Vote Leave. Within the Treasury, the expectation is that the initial “Brexit shock” has been pushed back until the last quarter of the year, when the election of a new Conservative leader will give markets an idea of what to expect.  

Michael Gove, who kicked off his surprise bid today, is running as the “full-fat” version offered by Vote Leave: exit from not just the European Union but from the single market, a cash bounty for Britain’s public services, more investment in science and education. Make Britain great again!

Although my reading of the Conservative parliamentary party is that Gove’s chances of getting to the top two are receding, with Andrea Leadsom the likely beneficiary. She, too, will offer something close to the unadulterated version of exit that Gove is running on. That is the version that is making officials in Whitehall and the Bank of England most nervous, as they expect it means exit on World Trade Organisation terms, followed by lengthy and severe recession.

Elsewhere, both Stephen Crabb and Theresa May, who supported a Remain vote, have kicked off their campaigns with a promise that “Brexit means Brexit” in the words of May, while Crabb has conceded that, in his view, the Leave vote means that Britain will have to take more control of its borders as part of any exit deal. May has made retaining Britain’s single market access a priority, Crabb has not.

On the Labour side, John McDonnell has set out his red lines in a Brexit negotiation, and again remaining in the single market is a red line, alongside access to the European Investment Bank, and the maintenance of “social Europe”. But he, too, has stated that Brexit means the “end of free movement”.

My reading – and indeed the reading within McDonnell’s circle – is that it is the loyalists who are likely to emerge victorious in Labour’s power struggle, although it could yet be under a different leader. (Serious figures in that camp are thinking about whether Clive Lewis might be the solution to the party’s woes.) Even if they don’t, the rebels’ alternate is likely either to be drawn from the party’s Brownite tendency or to have that faction acting as its guarantors, making an end to free movement a near-certainty on the Labour side.

Why does that matter? Well, the emerging consensus on Whitehall is that, provided you were willing to sacrifice the bulk of Britain’s financial services to Frankfurt and Paris, there is a deal to be struck in which Britain remains subject to only three of the four freedoms – free movement of goods, services, capital and people – but retains access to the single market. 

That means that what Brexit actually looks like remains a matter of conjecture, a subject of considerable consternation for British officials. For staff at the Bank of England,  who have to make a judgement call in their August inflation report as to what the impact of an out vote will be. The Office of Budget Responsibility expects that it will be heavily led by the Bank. Britain's short-term economic future will be driven not by elected politicians but by polls of the Conservative membership. A tense few months await. 

Stephen Bush is special correspondent at the New Statesman. He usually writes about politics.