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13 May 2025

Rachel Reeves shouldn’t U-turn on winter fuel cuts

It would be a dangerous risk for a high-borrowing government to bow to political pressure.

By David Gauke

It has been a few years since I spent a local election campaign “on the doorstep”, but the message currently to be found there appears to be clear. Voters “on the doorstep” hate the cuts in winter fuel payments. The government, it is therefore argued, needs to address the issue if it wants to restore its flagging popularity. Unfortunately, it is not as simple as that.

This is not to doubt the doorstep reports. Taking £200-300 away from the majority of pensioner households was never likely to be popular. People appreciate being given stuff and what begins as a privilege soon becomes an entitlement. Pensioners have a higher propensity to vote, and to be at home when canvassers call. These attributes have served them well – they have been largely shielded from tough decisions on public spending in recent decades.

Last July’s announcement on means-testing winter fuel payments, therefore, came as a shock. The fact it was the only major announcement in Rachel Reeves’ statement of 29 July gave the impression that pensioners were being picked upon. At one level, there was good reason to announce the change in policy early in that stopping the December 2024 payments required action before the October Budget but that is a hard point to convey.  

The real problem, however, can be traced to before the election.  In opposition, Reeves was cautious about making additional spending commitments but her priority was to reassure the electorate that taxes would not go up.  In trying to square the circle of avoiding spelling out the realities when in opposition and facing up to them in government, Reeves focused on short-term pressures in 2024/25 (which she could just about claim came as a surprise), rather than the longer-term situation (where any claims of this being a surprise would have been obviously implausible). This meant that there was a desire for in-year cuts and, therefore, a quick, unexpected and isolated announcement on winter fuel payments.

That may be the origin of Labour’s current predicament, but what now? For many worried MPs, the concern is that the government is boxed in by rigid and overly-cautious fiscal rules. The reality, however, is that the fiscal rules are sufficiently loose that, even if the OBR’s forecasts are correct and the UK economy grows (albeit modestly) over the next five years, debt as a proportion of the economy will be higher at the end of the forecast period than it is today. To put it another way, even if we avoid an economic shock that causes a recession and even before the worst impacts of an aging population apply, government debt can increase without breaking the fiscal rules.

This leads to two related problems. The first is that debt interest is increasingly expensive, forecast to cost us £111bn this  year. The second is that we have to find institutions willing to lend to us. We can, but the interest rate we pay – as measured by 10-year bond yields – is noticeably higher, at almost 5 per cent, than most other major economies. The US may be led by a capricious and irresponsible president determined to weaken its financial institutions, but its bond yields remain lower than ours.  Our bond yields may principally be about inflation expectations, but nervousness about our fiscal sustainability is not far from the surface. Worsen those concerns and our debt interest bill increases further.

This point was underlined by the events of the autumn of 2022 and the Truss/Kwarteng mini-Budget.  Fiscal credibility was abandoned, the markets took fright, the pound collapsed and bond yields spiked. It took the resignation of the Chancellor and the Prime Minister, plus a reversal of nearly all the tax announcements for confidence to be restored.

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It would be hyperbolic to argue that reversing the means-testing of winter fuel payments is on a par with Trussonomics. For a start, the cost of restoring winter fuel payments would be just £1.5bn, very different from the multibillion tax cut package set out in the mini-Budget. But it would be telling the markets something unsettling. Even with a landslide majority, even early in a parliament, even with a welfare measure that is so obviously ill-directed, a Labour government is unable to deliver even this modest cut.

It does not help that the wider fiscal situation appears to be deteriorating and tougher measures may be required in future. The uncertainty caused by Donlald Trump’s antics has slowed the world economy and the UK is far from immune to that (a partial US-UK trade deal notwithstanding). The OBR is, in any event, likely to review its productivity assumptions, which may lead to a downgrade in its forecasts for tax receipts. The National Institute of Economic and Social Research warned last week that the Chancellor may miss her fiscal rules by a very painful £60bn.

It is a fragile situation in which a wrong move may have a disproportionate impact. There is no shortage of demands for higher spending, but the priority should be those items which improve productivity or reduce future demand for public services (a point I may return to in the context of the criminal justice system in the near future). Winter fuel payments fail to meet either objective.

In a democracy, governments have to listen to the people. But high borrowing governments also have to listen to the people lending to them. Whatever the demands from the doorstep, the government would be taking a dangerous risk in giving way on winter fuel payments.

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