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11 September 2024

Rachel Reeves’ great gamble

Labour’s “Iron Chancellor” has staked her credibility on spending cuts. But will she regret it?

By George Eaton

Rachel Reeves’ favourite chess move is the Sicilian Defence. It’s an “aggressive”, risky opener, she likes to observe – one that often delivers victory but can also result in early defeat.

The Chancellor, typically cast as a cautious politician, has taken this spirit into the Treasury. Reeves has deployed a move shunned by all of her recent predecessors: cutting benefits for pensioners.

It was on 29 July, as a weary Westminster awaited the summer recess, that Reeves first announced her decision. Her House of Commons statement on Labour’s “spending inheritance” largely proceeded as expected. Reeves excoriated the Conservatives for leaving a £22bn “black hole” in the public finances, one that she was now tasked with filling. This strategy – heavily influenced by that of David Cameron and George Osborne in 2010 – is designed to toxify the last Conservative government’s economic reputation (to the anger of Reeves’ predecessor Jeremy Hunt).

But there was one surprise: Reeves announced the “difficult decision” that almost 90 per cent of pensioners would lose the universal winter fuel allowance. The benefit was introduced by Gordon Brown – who Reeves kept a framed photograph of in her Oxford University bedroom – back in November 1997. “[We] are simply not prepared to allow another winter to go by when pensioners are fearful of turning up their heating, even on the coldest winter days,” Brown declared then.

The policy survived six Conservative chancellors but has now been ended by a Labour one. Reeves’ announcement was met with silence from fellow MPs and ministers – who had not been informed in advance – but initially provoked little political fallout. The winter fuel decision was applauded by some policy experts who had long regarded it as an outmoded benefit. “A sensible choice,” tweeted Paul Johnson, the director of the Institute for Fiscal Studies, whose recent book Follow the Money is much admired by Reeves.

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Political attention was soon absorbed by the far-right riots and the government’s response (the murder of three young girls at a dance class in Southport took place on the same day as Reeves’ statement). That started to change in mid-August. Usually loyal Labour MPs assailed the winter fuel cuts. “It’s almost suicidal,” one told me then. “No build-up work, no explanation. Awful politics.” Lifelong Labour voters confronted MPs on the street and warned they would never vote for the party again. Meanwhile, even cabinet ministers privately questioned Reeves’ judgement.

There are few in Labour who reject the principle of means-testing the winter fuel allowance. “It’s hardly a cornerstone of the Beveridge settlement,” a former Brown aide observed to me. Instead the complaint is typically the cut-off point set by Reeves. Only households in receipt of pension credit – which guarantees a minimum income of £218.15 a week – will now receive the lump payment (currently worth £300 for the over-80s and £200 for younger pensioners). From next month, energy bills will rise by 10 per cent to an average of £1,717. Yet ten million of the 11.4 million pensioners who at present receive the benefit will lose it, including up to 1.6 million below the poverty line.

In media and political circles, pensioners are increasingly regarded as an affluent group – with some justification. Twenty-seven per cent now live in a millionaire household after a decades-long private property boom. But not all pensioners have fared so well. While relative poverty fell among this group from 25 per cent to 13 per cent between 2002 and 2011, it has increased by three points over the past decade. The Joseph Rowntree Foundation has estimated that Reeves’ winter fuel cuts would have led to an extra 100,000 pensioners in poverty in 2022-23.

Most politicians have long regarded pensioner benefits as untouchable. In 1980, Margaret Thatcher abandoned plans to cut the state pension by 3 per cent after cabinet ministers warned that this could provoke “social unrest”. Tony Blair and Gordon Brown never forgot the outrage prompted by the 75p increase in the state pension in 1999. David Cameron consistently protected benefits for pensioners – mindful of their crucial place in the Tories’ electoral coalition.

The only exception is an unhappy one. In 2017, Theresa May proposed means-testing winter fuel payments and spending the savings on health and social care. Labour responded by warning that the move would increase excess deaths by 3,850 that winter, describing it as the “single biggest attack on pensioners in a generation” (May U-turned following the loss of her parliamentary majority).

One backbencher tweeted a Labour campaign poster from 1945, depicting an elderly pensioner, that read: “She Laboured for you, now it’s Labour for her. Labour stands for decent pensions.” That politician was Rachel Reeves. “This time again, it’s Labour who will stand up for pensioners, defending the triple lock & winter fuel payments,” she declared, adding a contemporary spin.

What, some Labour MPs are asking, happened to this Rachel Reeves?

On the evening of 9 September, the Parliamentary Labour Party assembled in its traditional venue of Committee Room 14. Addressing MPs and peers for the first time as Chancellor was Reeves. Those present included the former Labour leader Neil Kinnock (who declared before the 1983 election: “If Margaret Thatcher wins on Thursday… I warn you not to grow old” in Britain).

The gathering was a defining moment for Reeves. Four days earlier, Ed Balls, Brown’s former economic adviser, had argued that she needed an “escape route” from the winter fuel cut. But the Chancellor gave the clearest sign yet that she is not looking for one. Reeves said she was “not immune to the arguments that many in this room have made”, yet stressed that “we considered those when the decision was made”. The facts had not changed so she would not change her mind.

The Chancellor reaffirmed her pledge to protect the “triple lock” on the state pension, which ensures that it rises by the rate of inflation, average earnings or 2.5 per cent (whichever is highest). From next April, this will mean an increase of £460. Reeves framed the drive to increase pension credit uptake as a patriotic mission, declaring that 800,000 people had been abandoned by the Conservatives.

Her rationale was well received by MPs (just one, Jon Trickett, a veteran Corbyn supporter, voted against the cut the following day in the Commons, though 53 abstained, albeit a dozen were authorised to be absent). “People reckoned with the difference between being a legislator and a commentator,” Josh Simons, the former head of the think tank Labour Together and MP for Makerfield, told me. “We don’t observe Rachel’s decisions and judge them, we make them with her. That is what it means to be an MP in the governing party.”

But one backbencher left the meeting with a deep sense of foreboding. “We seem to want to be more competent rather than fairer than the Tories,” they said. Reeves’ team, however, regards competency as crucial to Labour’s success. “One of the reasons we won the election was because for the first time in 14 years, people looked at us and thought: ‘We can trust you with our money,’” a Treasury aide said.

The Chancellor’s allies insist that focus groups and polling show voters respect decisions such as the winter fuel cuts as fiscally responsible – “sorting out the mess” – even if they personally dislike them.

There are past examples of governments winning re-election despite early unpopularity. Thatcher’s monetarist experiment was initially regarded as doomed but she won by a landslide in 1983 (bolstered by the Falklands War). Osborne’s cuts – such as the means-testing of universal child benefit in 2010 – did not prevent a Conservative majority five years later. Polling consistently showed that voters regarded austerity as necessary and the Tories as more credible than Labour.

Reeves’ team regards comparisons with Osborne as “lazy” but welcomes the wider implication: short-term unpopularity for long-term gain. But one Keir Starmer ally warns that “the national mood is not the same as in 2010”. Back then, voters had witnessed the near-collapse of the global financial system two years earlier (a fact the Tories ruthlessly blurred with “overspending” by Brown’s Labour). Satisfaction with public services was high after record investment by New Labour governments. As the longest period of economic expansion in British history ended in crisis, a period of sobriety was deemed in order. Now, the overwhelming public emotion is weariness. Luke Tryl, director of the think tank More in Common, defines the mood as “our country feels broken and we want someone to fix it. It’s a very different paradigm to the public finance focus of 2010.”

Reeves’ riposte is that she has no choice but to focus on the public finances: the national debt is now 99.4 per cent of GDP (compared with 65 per cent in 2010). The spectre of past Labour governments shredding their economic credibility haunts the Treasury. Her aides reject the charge that the public realm has been disregarded: public-sector pay has been increased by £9.4bn to address staffing crises; the abolition of non-dom status will fund higher NHS spending; the imposition of VAT on private-school fees will fund 6,500 more teachers, according to Labour.

Yet it is a cut that, for now, defines this Chancellor. As winter draws closer, political outrage will only intensify. Reports of pensioners choosing between heating and eating or, worse, freezing to death will fill the papers.

Should Reeves U-turn on fuel payments she will be branded “weak” – incapable of delivering the tax rises and spending cuts she has warned of. Should she persist, she will be labelled “cruel”. The nightmare scenario for the Chancellor is one in which she becomes perceived as both.

It was Denis Healey, the former Labour chancellor, who declared that his “first law of politics” was “when you’re in a hole, stop digging”. Rachel Reeves’ bet is that she is digging for victory.

[See also: Workers’ rights or growth? Another “tough choice” for Labour]

Cover artwork by Nate Kitch

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