Means-testing Winter Fuel Allowance is a disastrous shift in policy

Ed Balls’ announcement today that Labour would begin means-testing the Winter Fuel Allowance is a disastrous shift in policy.

During the 2010 leaders debate, Gordon Brown went on the offensive on universal benefits for pensioners, challenging Cameron to commit to keep a raft of support including help with energy bills for the elderly. As a result of his pledge to do so it has been politically impossible for him to touch Winter Fuel payments, despite calls from the Lib Dems and his backbenchers to do so. In today’s speech, Balls cedes all the ground that Brown sured up and in doing so has paved the way for pensioners to see benefits slashed regardless of who wins the next election.

Balls hopes that his speech will appease those who believe fiscal credibility is gained through making ‘tough decisions’ (read: spending cuts) but if he believes that ‘In the Black Labour’ and their Shadow Cabinet supporters will be bought off by a policy that cuts just 0.09% from the deficit then he is very much mistaken.

Cutting Winter Fuel Allowance in the way Balls plans would save just £100 million but the cost of this policy is significant. Much has been made by Cruddas’ policy review of a rather crass interpretation of a ‘contributory principle’, but this cut travels in the completely opposite direction.

For a welfare state to be successful it needs everyone to feel they have a stake in it. If some people feel like they go through life only paying in through taxes and getting nothing out, then support for welfare is eroded and people will resent paying taxes. Support for welfare has declined dramatically in the last 30 years, with those on benefits being demonised as “scroungers”, but if middle and high earners also receive benefits it’s less likely the payments will be stigmatised. People won’t buy into negative stereotypes of benefit recipients as ‘feckless shirkers’ if they’re benefit recipients themselves.

Means-testing benefits, similar to the heavily criticised way the government has tinkered with eligibility for child benefit, is massively inefficient and creates administrative costs that can even run the risk of eclipsing any anticipated savings. The variation in administrative cost between universal and means-tested benefits is clearly demonstrated by the stark contrast between the State Pension and the Pension credit; administration for a new claim for the former costs £91 while the latter costs £351.

Bureaucracy is not the only downside to means-testing, it also creates the real possibility that, in attempting to take benefits away from the richest, some of the most vulnerable slip through the net and fail to get support. Universal benefits are the most effective method to ensure that those who need the state’s help get it. Complicated forms, a lack of awareness of entitlement and people being too proud to claim means that a third of those who are eligible for Pension Credit are currently missing out, with something as vital as keeping the elderly’s house warm at winter we simply cannot take a gamble that the poorest won’t receive their payments. Not only would this be socially irresponsible but it would create a spiralling health bill for pensioners suffering from the impact of cold weather.

Labour should be immensely proud of introducing the Winter Fuel Allowance; it has saved countless lives and made a meaningful difference to the 3.5 million older households living in fuel poverty. Now is no time to turn our back on this benefit or the universal principle more generally. Balls should listen to Miliband when he, quite rightly, said in January “I think that universal benefits, which go across our population, are an important bedrock of our society”. And surely that’s what One Nation is all about.

Join Next Generation Labour for a discussion on Labour’s economic plans with Peter Hain MP, John Healey MP, Cllr Catherine West, Mick Burke and Heather WakeField – 6.30pm on Monday 10th June 

Austerity Isn’t Working – time to invest in growth and jobs

“Austerity is a suicide path”
Joseph Stiglitz, former World Bank Chief Economist and Nobel Prize winner, October 2011

Austerity isn’t working. The disastrous Tory economic experiment has left the economy stagnating, household incomes falling at their fastest rate in decades and unemployment soaring towards three million.

Even by the criteria the government has set itself, that of reducing the deficit, it is failing. The Tories are set to borrow £158 billion more than they planned!

In contrast to the government’s rhetoric, the most vulnerable are being hit hardest. A generation of young people is having its hopes ripped away. The Tories seem to think that one-in-five young people being out of work is a price worth paying.

Despite this, the Tories are ploughing on regardless with much worse to come. In the Autumn Statement the Tories extended deep spending cuts and pay squeezes for two more years and so into the next parliament. The Institute for Fiscal Studies has warned that 88% of the benefit cuts and 94% of cuts to government departmental spending are still to happen.

Greece and Ireland are the clearest examples how such austerity can destroy the economy and the very services that strengthen our society. Despite numerous austerity budgets both economies remain more than 10% smaller than they were five years ago!

Such austerity policies have undermined the UK economy meaning it remains 4% below its pre-recession peak, whereas Germany, and the US have recovered their lost output.

Clearly slashing government spending should be opposed. Not only is it socially regressive but it damages an already fragile economy. Likewise backing real term pay cuts for millions of public sector workers is not only bad politics for Labour but bad economics as it reduces economic demand further.

Creating growth, jobs and higher living standards should be the priority. Not only would this stop millions of people stop getting worse off but it would see government debt fall as increased economic activity leads to businesses and workers paying more tax and drawing less in benefits.

Increasing investment, not making cuts, is the solution to the economic crisis.

Growth needed to tackle the deficit

It is important to emphasise that that higher government debt is a direct result of the recession and lack of growth – not the other way around. As can be seen in the graph, prior to one of the deepest recessions in history hit in 2008, government borrowing was lower than for most of Thatcher’s time in office.

Borrowing soared following the onset of the crisis, the government had to step in to keep up demand in the economy as household and private businesses cut back on their spending. As a result borrowing of course went up, but many economists have warned that without this the economic position would have been much worse.

Furthermore, as the excellent website False Economy highlights, UK debt has been much higher in the past. In fact for a large part of the past century it was substantially higher. It peaked after the Second World War at nearly 250% of GDP. A huge stimulus in the form of the creation of the welfare state, the NHS, council houses and much more then meant that the economy grew and debt levels came down.

Such a process is exactly what we need today. The debt should be brought down but through growth. Yet the government has no growth plan – just an austerity drive.


“What is clear from UK history is that growth is a necessary condition for successful management of public debt. The huge spending cuts of the early 1920s failed to lower the ratio of debt to GDP, for example, because the economy then collapsed.”

Martin Wolf, Financial Times chief economics commentator, February 2012


Tory cuts suck the life out of the economy

Growth has all but come to a standstill since Tory economic policies took hold in the autumn of 2010. As Ed Balls has said,

“The British recovery has been stalling since the government’s spending review in the autumn of 2010, but now the economy has gone into reverse. Since the Chancellor’s spending review the economy has grown by just 0.3% compared to the 3.0% the government predicted”.

The graph shows the damage that Cameron and Osborne are doing to economic growth. Whilst they routinely speak of a dire inheritance from the Labour government, in reality by the time the Tories came to office economic recovery was underway. Five quarters of growth had seen GDP expand by 2.8%. Five quarters after the Tory austerity measures began to strangle the economy in 2010, the economy has grown just O.3%

That’s why Labour is right to back a stimulus such as outlined in its 5 point plan for a £2billion tax on bank bonuses to fund 100,000 jobs; bringing forward long-term investment projects; reversing the damaging VAT rise; a one year cut in VAT to 5% on home improvements; and one year national insurance tax break.

Investing in growth and jobs

As the economy has stalled living standards have been hit, further depressing the economy as demand falls. However the core of the ongoing recession has been the collapse in private sector investment. As Socialist Economic Bulletin has pointed out for most of the recession, this accounted for well over half of the fall in GDP.

The lack of business investment takes place at a time when businesses are sitting on huge amounts of cash. The case is so great that even Jeremy Warner, assistant editor of The Daily Telegraph said on February 7th 2012:

“Ian Stewart, chief economist at Deloitte, notes that large companies have built up record cash reserves in the past three years… At the last count, the cash holdings of UK non financial companies stood at £731.4billion, the highest level on record and equal to approximately a half of annual UK GDP. ..The more the private sector saves, the more the government is forced to borrow to support demand. What the economy needs is for the corporate sector to start spending and investing. Instead, companies are either hoarding cash or paying it out in dividends to investors, who in today’s risk averse environment, are more inclined to save it too than re-invest it.”

With household incomes being driven backwards and the private sector not investing it is clear that government has to step into the void to ensure there is investment which will create growth.

Below are ways that this can be done.

Of course the Tories will throw back the charge that this is unaffordable. But that ignores basic economic facts and the seriousness of the economic situation. With the current depression in the economy having lasted longer than that in the 1930s it is time for bold solutions to these very deep problems.

Growth, living standards and jobs need to be at the centre of the debate and progressives need to strengthen our voice against the Tory attempt to restrict discussion to one of cuts and economic pain.


“A slump is a good time to invest in infrastructure… funding is cheap, and many of the resources you would use would otherwise be unemployed. There’s really a compelling argument that we should be doing a lot of public investment right now.”
Paul Krugman, Nobel economics prize winner 29th December, 2011

Further Policies to Support Growth

1. Investment can stimulate the wider economy and pay for itself

Just as cuts deepen the recession, investment can get us out of it. Stimulating the economy through government investment in housing, public transport, education and green measures would not only address important social needs but would expand the whole economy and so increase revenues going back to the government. In the economic jargon this is the multiplier.

Ed Balls explained this very clearly in his ‘There is An Alternative’ speech at Bloomberg in 2010,

With “a £6 billion investment this year and next, we could build 100,000 extra affordable homes which it’s been estimated would create up to 750,000 new jobs, directly in the construction industry and indirectly in the supply chain including thousands of apprenticeships for young people. Crucially, all the extra growth and tax revenues these plans would create would help us pay down more of the deficit later on when the economy is fully recovered.”

As Joseph Stiglitz, Nobel Prize winner, said, a stimulus,

“focused more on returns on investment, education, infrastructure, technology..if you do those kinds of high- powered investments, the long-term national debt will be actually lower and the growth in the future will be higher.”

This is not just about helping the public sector but would boost private sector too. As the Unite briefing Going for Growth explains a stimulus that led to more people in work would see these people,

“spend their wages on the high street: buying clothes, eating out, enjoying holidays and so on – creating additional jobs and profits for these companies. These companies, their suppliers and the retailers where we spend our money then pay more tax on their bigger profits. All of this tax goes to the government and acts to lower our deficit.”


2. Creating a State Investment Bank from the bailed out banks

As economists Michael Burke, George Irvin and John Weeks argue in their pamphlet A Brighter Future for the British Economy, a National Investment Bank, could get investment up by using the government’s majority shareholdings,

“to simply instruct RBS [and Lloyds] to invest in those sectors prioritised by the government for an increase in investment, eg. housing, transport, infrastructure and education. The jobs bonanza created by this investment would sharply increase taxation revenues and lower welfare payments. The consequent improvement in government finances could be used to pay down the deficit or to increase investment further, or some combination of the two”.

In the foreword to the pamphlet Jon Trickett MP argues,

“Many people might think it poetic justice to require the publicly owned banks to serve the public, and not the bankers” and that this is certainly better use than Tory plan “to sell off the public’s stake in the banks at a knock down price and then attempt to use it to justify a pre-election tax give-away”.


3. Taking advantage of low interest rates

Others argue that government borrowing costs are so low – even negative in real terms – that investment can be paid for through borrowing.

A Guardian editorial recently said,

“With the UK poised to go back into recession, the government ought to be borrowing more to invest. Directing cash into public housing or into huge time-limited tax incentives for business investment would create jobs, as well as being good in themselves”.

The Tories argue this is not acceptable – but they are borrowing £158billion more than planned due to the low growth resulting from their policies. It is surely better to borrow to invest in jobs and growth rather than to fund a failing economic policy.


4. Progressive ways of raising revenue for investment

Of course there are also many ways that the government could raise money to spend on stimulating the economy.


Austerity Isn’t Working – download as pdf

Shape the welfare debate on our own terms, writes John Percival

Earlier this month, Owen Jones wrote an excellent piece attacking Liam Byrne’s ‘capitulation’ to the right on welfare reform, responding to an article Byrne had written outlining the Labour front-bench’s position on the issue. Rather naively, I decided to reserve judgement until some actual policy detail was outlined, but as the leadership prepares to instruct its Peers not to block the Government’s £26,000 benefit cap it is clear that the Labour Party is failing the most vulnerable in their greatest time of need for a generation. More importantly, the leadership is missing a crucial opportunity to shape the debate on this issue and highlight the true damage being caused by Tory policies.

During his Q & A session at conference, Ed Miliband was asked by a disabled party member whether or not he’d stand up for disabled people in light of the Tory onslaught on their entitlements (a 20% cut to the DLA budget, time-limiting ESA and a cap on housing benefit to highlight just three). Disappointingly, he chose to focus his response on attacking people on out-of-work benefits. This approach has been replicated by the party leadership whenever welfare reform has on the public agenda. Presumably the argument goes that the public’s attitude has hardened when it comes to welfare, as highlighted by the recent Social Attitudes Survey, and that Labour needs to reflect this if we are to take power in 2015. Recent events however, have shown that the picture is much more complex.

Recently, we saw the publication of the Spartacus Report highlighting the impact of the Government’s DLA reforms and misinformation published by the Government. The response was incredible. Within hours #spartacusreport was trending on twitter. Newspapers as diverse as the Daily Mail and Guardian were publishing blogs highlighting the unfairness of the proposals and the comments from the public were almost universally supportive. This challenges the view that the public are inherently reactionary, when it comes to welfare and that they are more than prepared to oppose changes to benefits that will hurt the most vulnerable.

For me, Ed Miliband’s most effective performance at PMQs was on 15th June 2011 when he riled the Prime Minister by articulately outlining exactly how the Government’s reform of ESA will hit cancer patients. I believe this approach should be replicated, with Labour continuing to highlight specific examples of where Government’s changes will hit the most vulnerable hardest. There are countless examples of this. Did you know, for example, that as a result of the changing of indexation that benefit increases are calculated by from RPI to CPI, at the end of this financial year carers in receipt of Carers’ Allowance will be over £46 worse off than they would have been, had the change not been made. At the end of the next financial year the figure will be over £100. This effect of the change is something I have not seen reported on in the mainstream media.

By repeatedly highlighting, the unfairness of the Government’s reforms, Labour can shift the debate on welfare reform away from talk of benefit cheats and of ‘scroungers’ and onto how the Tories are harming the lives of the most vulnerable. Not only will we be giving a voice to those most in need but we will be shaping the debate, in a way that captures the mood of the public without ‘capitulation’ to the agenda of the right.


John Percival tweets at @johnwpercival