There I was, trying to be helpful to the Labour government, taking the time and effort and making use of my ministerial experience to provide some constructive advice on a challenging policy area, and what do they do? Completely reject it. Yes, the case for maintaining the cuts in winter fuel payments – made here a few weeks ago – has been ignored.
I am not altogether surprised, given the evident political pain the issue is causing. It is, nonetheless, a mistake. Events since the announcement of a change of tack have only confirmed this.
For a start, there is still no plan that has been set out as to what happens next. Administratively, the government can give the winter fuel payment to all pensioner households or only to those householders eligible for pension credit. Anything else requires a new system which takes time to set up, which means that there will probably be no change for this winter. This will come as a shock to many pensioners who will have spotted the climb down and assumed that £200-£300 will be in their accounts by Christmas, causing another round of disappointment.
Of course, once a new system is in place, whoever misses out will feel aggrieved and whoever receives it will show little gratitude. In the interim, ministers are just asked lots of questions, but have few answers.
Quite a few of these questions are about other areas within the benefits system where there is demand to be more generous. The Prime Minister has also let it be known that scrapping the two-child cap is now a priority, so the focus quickly moves on to reform of disability benefits, only recently announced. Once you have conceded once on welfare reform, it becomes a habit that is hard to kick.
Giving the impression of losing control is politically damaging but, as I argued before, the real concern should be the reaction of the bond market. The claim that a stronger economy means we do not need to find savings in this area stretches credulity. There are some encouraging signs in the economic data, but also discouraging ones. Assuming that the next OBR statement will deliver good news appears to be wishful thinking.
In any event, in a world in which Donald Trump is in the White House, nothing is guaranteed. Not least of the Trump risks that may have a knock-on effect on the UK is his fiscal irresponsibility. The US has a budget deficit of 6.4 per cent of GDP, a figure that should be seen as uncomfortably high even in a recession, let alone at a time of full employment in the US. That deficit is before we see the impact of the “big, beautiful bill” that delivers huge, unaffordable and often nonsensical tax cuts. It is hard to envisage that there will ever be the political will to address this ballooning deficit, and it is inevitable that both the markets and the credit rating agencies have got twitchy (Moody’s has just downgraded its rating of the US).
Unfortunately for the UK, if financial institutions are reluctant to lend to the US government, that does not make them more likely to lend to us. A plausible scenario is that we are moving towards some kind of US sovereign debt crisis, in which other countries in a vulnerable position become embroiled. That would almost certainly mean us.
For historic reasons, Labour does not get the benefit of the doubt from the financial markets. Market turbulence caused a Labour prime minister to form a National Government in 1931. Labour governments were forced into devaluations in 1949 and 1967 and the IMF crisis of 1976 also resulted in a national humiliation and a dramatic change of economic policy.
In all of these cases, these crises were followed by periods of fiscal caution, even austerity. The political consequence was that Labour faced a double blow as it suffered the pain of tight spending controls while also reinforcing the impression among many voters that it was fiscally irresponsible.
New Labour, conscious of this historic baggage, took a different approach. It had the benefit of a strong fiscal inheritance but spent its first few years in office establishing a reputation for prudence, principally by sticking to Ken Clarke’s spending plans. Some of us would argue that, by the time we got to 2010, Labour showed insufficient determination to keep the markets onside but it left office without suffering a collapse in confidence in UK fiscal policy. That would have to wait until 2022 and the Truss/Kwarteng mini-Budget.
In opposition, Rachel Reeves sensibly defined herself against such irresponsibility. The most convincing argument for making a tough, early announcement on winter fuel payments was that this was a signal of fiscal rectitude, reassuring the bond markets that this was a Chancellor willing to take unpopular actions to stabilise the public finances. That there would be strong objections should not come as a surprise, it was a feature not a bug of the policy.
It is always sensible (and the perpetual advice of Treasury officials) to ensure that we do not catch the eye of the bond market vigilante. Keep your head down, stay in the pack, and don’t do anything provocative. Now, just at the point when the bond market vigilante is on the prowl, we see a retreat on winter fuel, combined with a shift in tone on control of welfare spending. It is an unfortunate combination. If the government is unlucky, it could prove to be a disastrous one.
[See also: The revolt against Reeves]
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