Will the UKs Iron Chancellor Melt Under the Heat?

(Bloomberg Opinion) -- When does a tactical retreat become a rout? Keir Starmer performed his biggest U-turn in government yet on Thursday by promising to reinstate some pensioners’ winter fuel allowance (WFA), which he cut last July. The prime minister caved in after muttering from disaffected Labour backbench MPs became a roar - and the measure had become totemic of much that the voters dislike about a government, now languishing in the opinion polls behind the populist Reform UK party.

The prime minister can just soldier on. No one, not even Starmer, who prides himself on his “pragmatism,” knows what his guiding light is on the economy. As a former lawyer with a strong record on human rights, his hand can be detected in liberal prison reforms and deference to international courts; otherwise he seems most at home with his international affairs brief.  A number of Downing Street economic advisers have quit without explanation over the last fortnight. They seem to have been none the wiser about their boss’s economic philosophy too - or were underwhelmed by it.

Starmer has a history of tacking with the prevailing wind, but the threat to Chancellor of the Exchequer Rachel Reeves’s credibility from the winter fuel climbdown is greater than other flip flops. It isn’t uncommon for chancellors to be forced to make a screeching U-turn after a tax-raising measure lands badly. Reeves, however, sold last July’s cut to the “WFA” as a necessary sacrifice for winning the confidence of financial  markets,  perennially suspicious of Labour’s fiscal incontinence. It was an early, self-imposed test of discipline to curb borrowing - which the self-styled “Iron Chancellor” has now flunked.  The amount at stake is £1.4 billion ($1.9 billion), a modest sum by Treasury calculations.

But the cost is really to the chancellor’s credibility. It also embroiled her own and the PM’s communications team in denying  reports that the chancellor would change course - right up to the day she did. A perception of unreliability is beginning to set in around the Starmer government, which feeds a sense of nervousness.

There might be good reason for that: Three weeks away from her public spending review, April’s official figures showed that the government is spending £6.6 billion more than a year earlier.

Despite a tax-raising budget last autumn, public-sector salary increases and spending on benefits have overtaken the rise in receipts. Over the last 12 months, borrowing has increased by £11 billion more than forecast by the Office for Budget Responsibility, the guardian of her fiscal rules. The sizeable cost of servicing the debt — often highlighted by Labour in opposition — mounts as international markets take fright at the Trump administration’s profligacy. 

The chancellor’s climbdown won’t end the episode. Any pensioners who benefit from the U turn face having to wait a year to have payments reinstated. And the problem with promising reversals is that it stimulates appetites for other retreats: pressure is also mounting on Starmer and Reeves to U-turn on proposed welfare cuts. More than 170 Labour MPs, enough to overturn the government’s House of Commons majority, have signaled they have had enough and made that clear in a spate of letters to the chief whip - and in a testy meeting last week with the premier himself. 

Reeves is now also having to guard her flanks against two shadow chancellors. Unfortunately for her, both of them are in her own party - Deputy Prime Minister Angela Rayner and Gordon Brown, a former Labour prime minister and long-serving chancellor (later PM) - and  once a role model for Reeves as an aspiring politician.

Rayner is the Labour party’s darling and has the authority of her mandate as directly elected deputy leader, whereas most of her colleagues owe their status to the whims of the PM. Her back story - she left school pregnant at 16 to make her way in the world of trade union politics and fought her way through the man-o-spheres to the top table of her party.

That means she had both deep union support and a solid base among “soft left” MPs dismayed by Starmer and Reeves’s apparent conversion to austerity, which many of them consider to be a Tory crime. What, they now argue plaintively, was the point of electing a Labour government if it takes money away from pensioners and the disabled? A series of newspaper leaks reveal the deputy leader arguing with the chancellor for eight new taxes on the better-off to avoid cuts in public spending. And in an appeal to working class voters lost to Reform, Rayner also suggests cutting welfare payments for foreigners. These are bold ideas and ought to have been hashed out with the pros (and many cons in terms of Labour’s overall positioning on tax) in opposition. But to surface them in contradiction to the chancellor under pressure to make her sums add up feels like a nose-thumb.

Yet economic reality can’t be waved away with a magic wand - or  U-turn. Without benefits reform, public spending can’t be controlled. As the Welfare Secretary Liz Kendall admitted in an interview this week “there are now 1,000 new personal independence payment awards every single day.” Meanwhile, public sector unions are threatening to strike over their annual awards, even though they more than match inflation and the government’s strategy was to seal off industrial discontent with early deals on taking office.

To cut through  this muddle of peevishness, job jostling and justified criticism, Reeves has three courses: Cut spending or raise taxes in the autumn or put off tough choices in the hope that something better will turn up. The markets would certainly prefer a combination of the first two options. Most Labour MPs naturally prefer a combination of the second and third. 

We will discover what material the chancellor is made of — the price of giving way on too much so soon is that the mantle of “iron” chancellor melts. She had to give way on winter fuel. But Reeves will need to move fast to make it clear that this U-turn is an exception not a rule.

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This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Martin Ivens is the editor of the Times Literary Supplement. Previously, he was editor of the Sunday Times of London and its chief political commentator.

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