Labour's challenge to fund its pensioner U-turn
Three-quarters of pensioners in England and Wales will have their fuel payment restored in full this winter, confirmed Rachel Reeves today, ending weeks of speculation about the scale of the U-turn the Chancellor was preparing to enact.
This is a dramatic reversal of one of the first big policies brought in by this government, and one of its least popular: as I’ve written previously, anger at the government's decision to strip all but the poorest pensioners of their £300 winter fuel allowance was a policy consistently singled out to explain Labour’s thumping local election losses last month.
Reeves took the decision last July to slash the number of pensioners eligible for this (previously universal) winter benefit from 11.4 million to 1.5 million. After today’s change, 9 million pensioners (all those with an income of £35,000 or less a year) will again receive their annual fuel allowance.
In fact, the government will restore the automatic payment as a universal benefit but higher-income pensioners (those receiving above £35,000 a year) will then repay the money when they file their tax returns. This method is a similar approach to that taken by the former Conservative chancellor George Osborne when he reduced child benefit eligibility for better-off parents.
Today’s confirmed U-turn has created plenty of opportunity for opposition parties to paint Labour as a government in chaos, forced to reckon with the fact it enacted a terrible policy. And Nigel Farage has wasted no time in characterising the reversal as a desperate attempt by Starmer to win back the pensioners deserting Labour for Reform. Labour ministers, meanwhile, are attempting to put a positive spin on the U-turn, insisting it shows that Reeves has listened to the public’s concerns.
All of which is perhaps true. Regardless, now the government must find a way to fund its policy upheaval - a change that will cost an estimated £1.25bn.
When Reeves first announced the unpopular policy last summer, she framed it as a “tough decision” but an essential one to plug the much-cited £22 billion “black hole” in the public finances, left behind by her Tory predecessors.
Reeves and Starmer are now suggesting that Labour can afford to reinstate winter fuel payments again because the economic outlook has improved under their watch.
They make an unconvincing case. The UK economy isn’t by any stretch of the imagination growing more strongly than it was last summer. Indeed, “to suggest the fiscal situation has got a lot better” since the government stripped 10 million pensioners of the winter fuel allowance last year “flies in the face of reality”, warns Paul Johnson, head of the IFS.
Johnson added: “If they are saying [the fuel payment U-turn] means there will not be any additional borrowing, then it follows, as sure as night follows day, that this will mean they will need to raise the equivalent of an additional amount of tax”.
On Wednesday, Reeves will unveil the Labour government's spending priorities for the next three years in her much-anticipated spending review.
While the Autumn budget provided the chance for Reeves to lay out her plan on how she would tax and borrow to fund the government’s overall levels of spending, the spending review serves a slightly different function: here, the Chancellor will set out exactly how that money is divided up between the different government departments.
This means that Reeves isn’t expected to explain how she intends to fund the change to pensioner payments on Wednesday. That will wait until the next Budget.
This buys her some time to figure it out, though it will likely lead to accusations too that she has made an unfunded pledge.
While we wait for the next Budget, we can, according to the IFS, make an educated guess on what conclusion Reeves will reach: come Autumn, expect “chunky tax rises”.
Caitlin Allen
Deputy Editor
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