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Why Labour has pledged to remove the winter fuel allowance from wealthy pensioners

Balls's announcement is an attempt to exploit the divide between the Tories and Lib Dems on this issue and to demonstrate his commitment to fiscal discipline.

Ed Balls will promise "an iron discipline" on public spending in his speech on the economy at Thomson Reuters tomorrow. Photograph: Getty Images.

A frequent criticism of Labour is that while acknowledging the tough fiscal conditions it will inherit (a deficit of £108bn, or 5.9 per cent, to be precise, the largest of any western nation), it has said little about the cuts it would make. It is a charge Ed Balls will seek to address tomorrow in his speech on the economy at Thomson Reuters.

In the first welfare cut proposed by the party, Balls will announce that Labour would remove the winter fuel allowance (worth £200 to those aged over 60, rising to £300 for those over 80) from the wealthiest 5 per cent of pensioners. Here's the key passage:

With the Chancellor refusing to change course, Labour must start planning now for what will be a very tough inheritance in 2015. It will require us to govern in a very different way with much less money around. We will need an iron discipline and a relentless focus on our priorities.

And this iron discipline on spending control must go alongside action to deliver a fairer approach to deficit reduction. And that will mean answering big and immediate questions for 2015 in our manifesto.

When our NHS and social care system is under such pressure, can it really remain a priority to pay the winter fuel allowance - a vital support for middle and low income pensioners - to the richest 5% of pensioners, those with incomes high enough to pay the higher or top rates of tax?

Labour believes the winter fuel allowance provides vital support for pensioners on middle and low incomes to combat fuel poverty. That’s why we introduced it in the first place. But in tough economic times we have to make difficult choices about priorities for public spending and what the right balance is between universal and targeted support. So at a time when the public services that pensioners and others rely on are under strain, it can no longer be a priority to continue paying the winter fuel allowance to the wealthiest pensioners.

While the pledge is of little economic significance - around 600,000 pensioners will be affected, saving just £100m a year (a point the Tories will be quick to make) - it is politically notable in three respects.

First, ahead of the Spending Review on 26 June, it is a dexterous attempt to exploit the divide between the coalition parties on this issue. The Lib Dems have long argued that universal benefits such as the winter fuel allowance, free TV licences and free bus passes should be removed from wealthy pensioners (or taxed) but David Cameron, mindful of the pledge he made to protect them at the 2010 election, has rejected any move to do so. But with many Tories opposed to further significant cuts in areas such as defence and policing, he will now come under greater pressure to reconsider this position. The Lib Dems have previously signalled that they would be prepared to consider further cuts to working age benefits if the Conservatives drop their opposition to means-testing pensoner benefits, a deal that Iain Duncan Smith (who recently suggested that wealthy pensioners should hand them back) would certainly be willing to strike.

Second, the announcement that protecting the winter fuel allowance is "no longer a priority" for Labour, represents a significant break with universalism by Ed Miliband. The Labour leader has previously defended universal benefits as a "bedrock of our society", often echoing Richard Titmuss's observation that "services for the poor end up being poor services". But as it develops its policy offering on welfare, Labour has decided that this position is no longer sustainable. The party is exploring ways of reasserting the contributory principle, such as a salary insurance scheme, which will increase the benefits bill in the short-term, meaning (in Miliband's view) that cuts will have to be made elsewhere. As Balls will say in his speech, Labour plans a "relentless focus" on its priorities: employment, housing, childcare and social care. In need of all the spare revenue it can get, the party has concluded that an absolutist position on universal benefits cannot be justified.

It is not a decision that will be welcomed by all on the left (I made the case against it here last month). Peter Hain, for instance, an early supporter of Miliband, has warned that "cutting or means-testing pensioners' allowances risks turning young against old and rich against poor while making negligible savings for the Treasury."

Third, the pledge is the beginning of a renewed attempt to convince a sceptical electorate that Labour can be trusted to manage the public finances. A new Survation/Labour List poll shows that less than a third (30 per cent) of voters believe it can be.

While continuing to make the case for an economic stimulus now, for instance by bringing forward capital spending from 2015 (funded by "a temporary rise in borrowing"), Balls will balance this message with an emphasis on the fiscal discipline that Labour would pursue in office. Like his mentor Gordon Brown in 1997, he will promise to be an "iron Chancellor". It was Balls, remember, who helped mastermind Labour's '97 pledge to stick to the Tories' spending limits for two years as well as the decision to use the £22bn raised from the 3G auction in 2000 to pay down national debt.

With economic conditions so uncertain, Balls will avoid announcing detailed spending plans until closer to the election (Blair and Brown waited until January 1997 to show their hand - and that was when the economy was booming) but at some point before 2015, he will announce Labour's own fiscal rules to eliminate the current deficit and reduce the national debt as share of GDP (party figures talk of a five or ten year timetable). In his speech tomorrow he will acknowledge that Labour "will have to plan on the basis of falling departmental spending." In other words, not only will the party be unable to reverse most of the cuts imposed by the coalition, it will have to introduce its own. Balls will say:

[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.

Labour will set out a clear and balanced plan to support growth, alongside a clear timetable to get the deficit and the debt down - finishing the job where this Government has failed.

Expect a similar emphasis on fiscal responsibility when Ed Miliband delivers his speech on welfare on Thursday. Miliband will announce that Labour would introduce a cap on structural welfare spending, such as housing benefit, a move designed to pre-empt George Osborne's pledge to announce a new limit on annually managed expenditure (which accounts for half of all public spending and includes welfare, debt interest and EU contributions) in the Spending Review. Miliband will say that Labour would seek to reduce demand for welfare through a major programme of housebuilding, greater use of the living wage and a job guarantee scheme, but the announcement is still likely to prompt a backlash from the left.

By pledging to reduce the deficit and the debt, and control welfare spending, Labour will aim to give itself the political cover it needs to invest significantly more than the Conservatives in the priority areas I mentioned earlier: employment, housing, childcare and social care. In response, expect the Tories to point out that, having refused to apologise for "overspending" in the first place, Labour would borrow more and "crash the economy" all over again. Whichever argument the voters side with will do much to determine who comes out on top in 2015.