Labour says the economy is better - but it's telling that we don't yet know where this money's coming from

Faisal Islam
Economics editor

Essentially the winter fuel payment will be paid out to every pensioner again, and then clawed back from two million pensioners with incomes over £35,000 through the tax system.

It means that the overall policy will save £450m versus the universal system. In other words, £1.25bn of the £1.7bn projected saving when this policy was announced is gone. That's a massive U-turn.

While it’s for the politicos to determine whether the political damage was worth it, it is interesting to go back to the original rationale for the policy nearly a year ago.

The Treasury said it was looking for "in-year" savings within the same fiscal year, to make up for some shortfalls in the public finances. In technical terms, it was one of the easier options to save money quickly, and communicate to the markets a willingness to take tough unpopular decisions, when the general thrust of policy was to spend, tax and borrow more.

Chancellor Rachel Reeves and Prime Minister Keir Starmer have tried to make an argument that the economy is now doing better, and so there is enough space to give back these payments.

While economic growth was better than expected in the first quarter of the year, it is right now a little early to assume that this will sustain. It’s a volatile time. The Office for Budget Responsibility (OBR) - which monitors the UK government's spending plans and performance - will also consider other factors such as rising government borrowing costs.

Ultimately, a £1.25bn giveaway is relatively modest in terms of overall government spending - and falls well below the threshold at which the OBR could initiate its own immediate costing.

It is telling, however, that the chancellor has chosen not to identify exactly how this will be paid for just yet. While this will have to come by the time of the Budget, there are many other pressures on the public finances.

Source: BBC.