3 days ago
At last the ‘Iron Chancellor' has turned, but the cost could be fatal
While Rachel Reeves has often invoked the soviet nickname embraced by Baroness Thatcher, she has typically struggled to live up to the 'Iron Chancellor' moniker she craved.
Where Thatcher declared 'the lady's not for turning', Reeves has more frequently been found flip-flopping.
We now have details of the latest volte-face, and a rough value has been ascribed to the political capital Labour burnt during its first major fiscal event.
The price of all goodwill afforded to a new government? £450m, or 0.05pc of the total tax take.
Since the winter fuel payment was first scrapped for all pensioners except those in receipt of pension credit, we've been patiently expecting this about-turn, which doesn't scream confidence in government policy.
At midday yesterday, HM Treasury confirmed that a new arbitrary figure had been laid down to determine the deserving/undeserving old, this time set at £35,000. Those below this line of personal income will be entitled to £200 per household (up to £300 if all residents are over 80), while those above it are not entitled to keep the money.
Yes, that is a personal income allowance to judge a household payment. On £35,001 and live alone? Not a penny. Two of you on £35,000 for a total household income of £70,000? The full amount. One of you above and one below? The payment will be split, and the one earning above the threshold will have to pay theirs back.
Will it rise in line with the triple lock? No clue. Where does £35,000 come from as a limit? Well it's less than average earnings and nowhere near any tax bracket, so answers on a postcard please.
Will the Government ensure only those entitled to the benefit receive it? No. It will be paid to all and clawed back through PAYE or self-assessment tax returns.
Sound complicated? It sure does – and complicated generally means expensive administration. High street accountancy firms will leap on the confusion, but I'm not sure this is the productivity boost Reeves dreamed of.
So far, nobody has cobbled together any estimates for how much this system will cost HMRC to develop and implement, but it's not zero.
Don't forget, the previous eligibility criterion of being a pension credit recipient has already sparked its own costs. According to former pensions minister, Sir Steve Webb, the flurry of new applicants has already added a £200m annual cost, reducing the benefit to Treasury coffers to just £250m, not £450m, before any admin costs are factored in. That's 0.03pc of the total tax take.
He explained: 'These changes wipe out most of the extra revenue which the Government was expecting to get from the winter fuel payment policy.
'Not only has the Government knocked more than a billion pounds off the expected revenue but it has also had to find more than £200m per year extra because of the surge in pension credit claims.
'Overall, the amount raised looks tiny relative to the political damage which the whole episode has caused to the Government.'
But it's not just political damage – in the immediate wake of the news, gilt yields rose.
Certainly, some element of this is simply factoring in the lower revenues the Government can now expect, but more critically, it is shifting perceptions.
The long shadow of Liz Truss's mini-Budget continues to haunt Labour, and they are likely to be undone by their own political spin.
Reeves et al oversimplified what happened in September 2022 and tied their hands in the process.
Changing policy is a natural part of government and waiting for the next Budget isn't always possible, but when you tell the nation (and markets) that it's fiscally irresponsible to do so, you cannot be surprised when eyebrows are raised.
Reeves's Spring Statement already effectively broke her promise of one major fiscal event per year – yesterday's revelation has broken most of the others.
The policy is not accompanied by an Office for Budget Responsibility (OBR) forecast (although one is promised for the next Budget), and weren't we told the cut was necessary to fill the black hole?
Before the changes, ING's James Smith, a developed market economist focused on the UK, had already predicted that Reeves would have no fiscal headroom – now she'll miss it by at least another £1.25bn.
With the two-child benefit cap also likely to be axed, which will add another £3.5bn to the outgoings side of the balance sheet, not to mention the £17bn cost of boosting defence spending to 3pc, Reeves is more likely to have a sore neck than any headroom.
But the Chancellor keeps painting herself into a corner – she has once again recommitted herself to not raising income tax, National Insurance or VAT. She has doubled down on her 'non-negotiable' fiscal rules and respect for the OBR, forcing her to fiddle with the margins every time the bond markets hiccup.
We'll have to wait and see what happens with Wednesday's spending review, but something will have to give soon, and it's looking more likely than ever that it will be Reeves.
