Chancellor makes 'mistake' with Winter Fuel Payment - but she has chance to make corrections

Liberal Democrat leader Sir Ed Davey calls it "the first big mistake this government has made".

The decision by the new Labour Chancellor Rachel Reeves to axe the £300 Winter Fuel Payment for 10 million pensioners forever is probably the biggest domestic headache for Prime Minister Sir Keir Starmer as MPs return to Westminster from their summer holidays this week.

It may soon lead to the first big climbdown by the incoming government.

In the first few weeks after winning July's general election, Labour has used its honeymoon to blame the last Conservative government for the poor state of the nation and the dim prospects for recovery.

Ministers exposed two "black holes" - the first is the gap between planned annual expenditure and expected income and borrowing. A subject widely discussed by everyone except the leading politicians during the recent election campaign.

More dramatically, on 29 July Reeves accused the Conservatives of hiding a further £22bn shortfall in the current year's finances.

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Her response was to make "incredibly tough choices", including limiting what had been a flat payment to all pensioners to only those on pensioner credit or other benefits.

This equates to just over a million of the total of more than 11 million who have been receiving the payments - those with incomes of £12,600 a year or less, a "very, very low" figure in the words of Martin Lewis, the personal finance expert.

At the same time as the cutbacks for the elderly, the chancellor announced she had found the cash to fully fund the above-inflation pay awards for the public sector and to buy off strikes by rail and doctors' unions.

These payouts account for around half of the short-term black hole Reeves claimed she had been left by the Tories, according to the Institute for Fiscal Studies.

Reeves 'caved meekly'

Impetuosity and inexperience lie behind the troublesome winter fuel announcement - for which no properly argued explanation, beyond regret, was offered.

Reeves appeared to have caved meekly to the Treasury's traditional bean-counting smallness, which often looks better on the spreadsheet than in the real world.

For a start, if implemented as the government says it intends, it would not even save the relatively paltry £1.5bn intended.

Currently, 866,000 poor people, some 30% of those eligible, do not take up pension credit. The government says it plans a drive to encourage applications.

Were they all to be successful the Exchequer would be out of pocket, spending more not saving.

Chancellor's easy pickings

A philosophical undertow in Starmer's Labour also helps explain why pensioners were the first call for his chancellor's easy pickings. Starmer does not declare "we are all in it together"; his concerns are more focused on "working people".

Most pensioners, especially the oldest, do not work. Starmer says he prefers to spend the money on making the trains run and shorter NHS waiting lists - mainly to benefit the workforce who he is relying on to deliver growth.

There is also a perception that it is time to level out ("up" is not the right word in this context) because pensioners have done better than younger cohorts in recent decades.

The last Labour government made ending pensioner poverty a priority and successive governments have kept the triple lock in place for state pension increases.

As a result, the former Conservative cabinet minister David Willetts, who now heads the Resolution Foundation, reports that pensioner incomes have doubled while incomes for the rest have only gone up by half in the same time period.

The difficulty for Labour is that comparisons between the generations are only relative. And relative pensioner poverty has actually gone up from 13% in 2011-2012 to 16% in 2022-23.

Reeves has created a painful cliff edge by limiting winter fuel payments to those on an income of £230 a week.

Pensioners not where Labour gets votes

There are millions of pensioners just above that red line who are also struggling to get by. This winter that will be even harder because the energy regulator Ofgem has approved a 10% rise in the energy price cap, on average that means a £500 annual increase in bills.

Pensioners are not where Labour gets its votes. The party's constituency is "working people".

The Conservatives focused heavily and unsuccessfully on older voters in this year's general election. As it turned out, a voter had to be aged 62 or over to be more likely to vote Conservative than Labour.

Nobody is Malthusian enough to say that it would be a good thing if pensioners die of cold, but the fact remains that the growing percentage of the population which is elderly is a major economic problem in developed countries, including Britain.

Until now, winter fuel payments (worth £300 to the over-80s and £200 to younger pensioners) were paid out automatically to all pensioners regardless of wealth.

Some poorer pensioners have also been eligible for a cost of living payment worth up to £300 and a one-off warm home discount of £150.

These payments should not be confused with the discretionary means-tested cold weather payments made by councils in the event of a sustained period of freezing temperatures.

Badly designed scheme

Starmer complained at his news conference last week that winter fuel payments are "not particularly well designed". By which he meant that wealthier pensioners who do not need the money were getting it.

That is true, although it could be regarded as a tax allowance. Reeves has rushed into introducing another badly designed scheme which will have millions of victims.

Her speech had relatively little impact when she delivered it at the start of the summer holidays on 29 July. Now the news has sunk in, 450,000 people have signed an Age Concern petition against the plan.

Conservative MPs have tabled an early day motion against it, which could force the government to hold a vote. Meanwhile, mainstream loyalist MPs are expressing their concern in private.

Slump in government's popularity

The generations are not taking sides against each other. Young people face much greater costs for higher education and are struggling to buy their own homes.

But, on average, there are also significant transfers of money down the generations as parents and grandparents do what they can to help out.

The government's popularity has slumped in opinion polls. Only 23% approved of the government, compared to 51% who disapproved in YouGov's survey last week. The fuel payment cut is opposed by all age groups.

Conservative politician Gavin Barwell gloated: "This is what happens if you aren't straight with the people before polling day - and yes, the Conservatives weren't either - and say you have to cut fuel payments for all but the poorest pensioners because there's no money while offering public sector workers more generous pay deals."

As her critics are pointing out, Reeves could have avoided controversy, and made the new system fairer, if she had simply said that from now on the payments would be taxable, as pensions already are. But she chose not to.

Instead, she made a similar mistake to former Labour chancellor Gordon Brown, who, by the way, introduced the Winter Fuel Payment. Brown abolished the 10p rate in his last budget and failed to take account of the income cliff edges he was creating for lower earners.

His admitted "mistake" caused an outcry. It dogged Brown's subsequent term as prime minister, while his chancellor Alistair Darling tried repeatedly to make up for it. And that was in a budget when Brown cut the basic rate of income tax. Reeves has no such plans.

The chancellor has a chance to make corrections. She could try and raise the cut-off threshold now.

It would be wiser to take a breath and to say now that she plans to give her plans further consideration in her budget, which is already scheduled on 30 October.

That would allow her to think again about her hasty and callous measure in the proper, broader, context of the economic situation in which citizens of all ages find themselves.

-SKY NEWS