Winter fuel payments for all — is this the beginning of Reeves' undoing?

Times

25-05-2025

Sir Keir Starmer was in his office in No 10 on Tuesday night when he told aides he was going to announce a U-turn on winter fuel during the next day's Prime Minister's Questions.
'He was really sure that he wanted to do it and knew it would come up in PMQs, so wanted to be able to give people a straight answer,' said one staff member present.
The decision had been taken at a meeting between Starmer, Rachel Reeves, the chancellor, and Pat McFadden, the chancellor of the Duchy of Lancaster, in the week following the local elections when Labour lost two thirds of their council seats that were being contested.
The PM had been privately lobbied by everyone from backbench MPs to members of the cabinet and even the Welsh first minister to change the policy, which had been a toxic issue on the doorstep and risked becoming Labour's poll tax.
The announcement was made in haste. He promised reforms to ensure 'more pensioners are eligible for winter fuel payments' without explaining either the mechanism for achieving that aim or how it would be funded.
He also said he wanted to implement the changes as soon as possible.
However, civil servants have categorically told ministers it will be impossible to introduce any proposed reforms in time for this winter as officials struggle to overhaul ageing computer systems. They have been told to spend the summer working on solutions to be presented in time for the next budget, in autumn.
Previously it had been reported that the government was looking at options for raising the income threshold at which pensioners qualify for payments, which was set last year at £11,500.
But it can be revealed that officials are examining options for an almost complete reversal of the policy amid claims this would be faster and easier to implement.
Although no decision had yet been taken, the aim would be to reinstate payment, worth either £200 or £300 a year per recipient, for all but the wealthiest pensioners.
Creating a new means test for the winter fuel payment would be highly complex and ministers are considering a simpler option, which is restoring it as a universal benefit and then recouping the money when high income pensioners fill in their tax returns.
A similar approach was taken by George Osborne, the former Tory chancellor, when he reduced the eligibility to child benefit for better-off parents.
Confirming that the government was considering an almost total reversal of the policy, a senior Whitehall source said: 'I think they will want to do it in a symbolic way that means that the millionaires won't get it, although it won't actually save you that much money just excluding the very rich people from it. However, they haven't yet found the exact mechanism by which to do it.'
There are also no guarantees the changes will be ready for this winter, although officials are looking at the feasibility of making backdated payments.
The announcement was timed to buy the government a bit of goodwill among its backbenchers after weeks of unease over Liz Kendall's proposed welfare reforms.
Labour MPs have been spooked by the Department for Work and Pensions' (DWP) own impact assessment which said the changes, which are worth £5 billion a year by 2030 and will restrict eligibility for Personal independence Payments, would result in an extra 250,000 people, including 50,000 children, living in 'relative poverty' by 2030.
But, as with many government U-turns made in the heat of political necessity, the concession may come back to haunt Starmer. The prime minister faces a challenge this week from Nigel Farage, the Reform leader, who is expected to pledge to scrap the two-child cap on child benefits and reinstate the winter fuel allowance, The Telegraph reported. Farage will use his first address since his party's successful elections to appeal to left-leaning voters and attack Starmer's record on benefits.
However, the public finances today are if anything worse than when Labour came into office. Economists think that the deficit in Reeves's finances could be as much as £60 billion.
So where does that leave the chancellor, who was out of the country when the U-turn came?
Given the scale of the challenge, tax rises in the autumn budget now look inevitable. The more that Reeves and Starmer concede on welfare, the greater the tax increases will have to be.
'She's [Reeves] in a really tricky place,' said a senior government source. 'Axing winter fuel payments for all but the poorest pensioners was supposed to send a strong signal to reassure the markets, shore up public finances and demonstrate that Labour is prepared to make tough decisions. So, obviously, if we are finding money for this, it opens up all sorts of questions about welfare, about the two-child benefits cap.
'We have always thought that scrapping the two-child benefits cap is not a vote winner, but at the same time, if you have to choose between giving money to pensioners, who are the only group in this country who are going to be significantly richer by the end of this parliament, versus handing money to impoverished kids, then it's pretty obvious what the priority should be.'
Starmer, Kendall and Bridget Phillipson, the education secretary, are among those in the cabinet who are said to be open to the idea of scrapping — or at least softening — the two-child cap on benefits.
However, it is opposed by the Treasury and Morgan McSweeney, Starmer's chief of staff, because of the £3.5 billion price tag and polling showing that there are few votes in it.
The Fabian Society has proposed a two-phased approach to scrapping the two-child limit, which they claim would be more palatable for voters. The first phase would include ditching it for working families, and families with a disabled child, before abolishing it entirely.
This first step would benefit nearly nine out of ten children under five (89 per cent) affected by the two-child limit, but would be far more popular than scrapping it completely in one big step, and more popular and effective than raising the cap to three children.
This is supported by new polling, which shows 46 per cent of voters would support removing the cap for families with disabled children, with 34 per cent opposing, while 45 per cent support removing it for families who are in work, with 35 per cent opposing it.
This compares with 32 per cent who support lifting the limit from two children to three children, with 51 per cent opposing it.
Just implementing the first step towards scraping the two-child limit — along with proposals to introduce a new baby and toddler element to universal credit — could result in one of the largest falls in early years poverty since the 1990s, lifting 230,000 children under-five out of poverty.
HANNAH MCKAY/REUTERS
Commenting on the findings, which have been shared with ministers, Ben Cooper, Fabian Society research manager and the author of the report, said: 'While the public finances are incredibly tight, the government can act to transform the lives of babies and toddlers living in poverty — and do so with public support.'
While there had been intentions to look at the cap in the spring, the plans, which form part of the child poverty strategy, have now been delayed until the autumn budget.
Another big pressure point for Reeves will be when she is urged to rip up her fiscal rules to allow for extra borrowing to stave off public spending cuts.
In addition, talks are already under way to bring forward other less costly elements of the strategy to mollify some of the 170 or more MPs who have raised concerns about benefit cuts.
Measures would potentially include broadening the eligibility criteria for free school meals and raising the amount paid to families in child benefit, currently £26.05 per week for the first child and £17.25 per week for subsequent children.
It is understood that changes could be announced at the spending review next month ahead of the crunch welfare vote, which No 10 insiders insist will go ahead in the second week of June despite rumours of a delay.
• Keir Starmer and Rachel Reeves backed down on winter fuel. What's next?
The spending review looks brutal. With the Home Office, Department for Education and Ministry of Housing, Communities and local government all facing real-terms cuts. Starmer will have a significant challenge on his hands just to retain cabinet order in the run-up to the review on June 11.
Angela Rayner, the deputy prime minister, is set to be one of the biggest losers of the review. She is said to have complained 'forcibly' about proposals to squeeze spending on housing during increasingly heated meetings with Starmer and Reeves.
She is also understood to be furious about rumours, now denied, that her department was set to be broken up, with a new ministry of housing created, as part of a wider Whitehall shake-up to better align departments with Labour's five missions of government.
It comes after a week of fevered speculation about her leadership ambitions triggered by a leaked memo revealing she had urged the chancellor to hike taxes on savers and high earners. She also suggested stripping middle class families of child benefit payments.
The ideas are popular with her allies on the left of the party, but were seen as provocative by critics. Rayner and her team have denied leaking the document, but that has been given short shrift by many in government.
Rayner had urged the chancellor to hike taxes on savers and high earners
CAMERON SMITH/GETTY IMAGES
One source said the leaking of the document showed her 'naked' ambition. 'It's just Angela being Angela,' they added. 'Whenever the party hits a rocky patch she always does this kind of thing to remind the parliamentary Labour Party that she is still here and has different ideas to others at the top of the party.'
However, Rayner is not alone in worrying about the 'huge pressures on housing' and the direction of the country as huge budget cuts loom. Lisa Nandy, the culture secretary, has told the New Statesman that the north of England is so tense it could 'go up in flames'.
'Last summer, when we had the horrendous murder of those young girls [in Southport], there was already a real sense of tension in the north,' she said. 'People have watched their town centres falling apart, their life has got harder over the last decade and a half … I don't remember a time when people worked this hard and had so little to show for it.'
It is a problem Starmer's team are acutely aware of.
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While the cost of living crisis is easing, with interest rates falling, there is now a living standards crisis they know needs to be addressed if they are to counter the appeal of Reform.
This includes also drawing up proposals to attract a new group of voters, known as the Henrys — people who are High Earners, Not Rich Yet.
A Whitehall source said: 'The fiscal position is still tough, but for the first time in a long time, the macro stuff is looking better. We are seeing things like the trade deals, the investment coming in, so the bigger picture is good but none of that means anything unless people feel it and you can improve peoples' living standards.'
But with the chancellor's cloth being cut smaller by the day, it will be a question once again of what is affordable, not just what is politically desirable, when the spending decisions are made.