Tuesday, September 03, 2024
Hyperbole won't win argument over winter fuel payments
The BBC report on remarks by the leader of the House of Commons, Lucy Powell, who is adamant that the government will not reverse its decision to scrap winter fuel payments:
About 10 million pensioners not receiving pension credit will lose the payment of up to £300 from mid-September, with Chancellor Rachel Reeves blaming a £22bn "black hole" in public finances for the decision to restrict the allowance.
MPs and charities have criticised the move in recent days, with the Conservatives and Liberal Democrats pushing for a Commons vote.
But Lucy Powell told BBC Breakfast she could not see a scenario in which Ms Reeves abandons her plan, and warned there could have been a "run on the pound" had the government not taken action on public finances.
Ms Powell acknowledged that losing the payment would make things even tighter for pensioners, but defended the government for taking "really difficult decisions" such as targeting winter fuel payments.
"The reason we are doing that is because the deficit was much higher than anyone thought, spending was higher than anyone thought," she said.
"If we hadn't taken that action we'd have seen a run on the pound, the economy crashing and the people who pay the heaviest price for that are the poorest, including pensioners and those on fixed incomes. That stability is really important for living standards."
She said Labour's commitment to the state pension triple lock and focus on economic stability would protect pensioners in the long term.
Putting to one side the fact that Labour are relying on the LiberaL Democrats policy of a triple lock on pensions to mitigate their policy, what Powell is saying is quite clearly nonsense.
As Richard Murphy points out here, there are many ways that the so-called £22 billion could be found, without cutting vital suppor services for the vulnerable.
This includes the Treasury taking out an an increased overdraft facility as it did in March 2020, or the Bank of England and Treasury could have agreed to do £22 billion of new quantitative easing.
Murphy says that to make that easier the government could have cancelled the quantitative tightening programme, which wholly unnecessarily sold £33bn of gilts between April and June this year without a penny going to the government to fund spending:
Alternatively, a new bond of £22bn could simply have been issued. That would have been easy to do. The City would have bought it, without the bat of an eyelid, most especially if the quantitative tightening programme had been cancelled.
Alternatively, a new bond of £22bn could simply have been issued. That would have been easy to do. The City would have bought it, without the bat of an eyelid, most especially if the quantitative tightening programme had been cancelled.
The next option for finding £22 billion would be to simply have the Bank of England cut its base rate by at least 2%. The economy desperately needs this. There is no way it can grow with rates anywhere near where they are. This would save more than £22 billion a year.
Finally, a wide range of tax increases on the wealth alone are available. Capital gains tax rates could be increased. Useless inheritance tax reliefs could go. Pension tax relief could be cut. VAT could be charged on financial services. See https://taxingwealth.uk/ for more.
My point is that cuts were wholly unnecessary, in my opinion.
Would the financial markets have agreed with me? I think so. They don't like quantitative tightening and would love to see it gone.
They would like rate cuts: they have no desire for the stress they have caused.
They could also easily find £22 billion for a new bond, with ease. They'd rather do that than see more quantitative tightening.
And they want the growth that Reeves is deliberately destroying with her cuts.
And everyone now thinks tax increases are inevitable now.
In other words, was there really likely to have been an adverse reaction to an honest suggestion from the government that it needed more funding that would have in any way spooked the markets? No, of course, there was not.
Nor was there anything to push interest rates up in any of this - most especially if quantitative tightening had been abandoned - which would have helped them fall.
And would exchange rates have collapsed when it is obvious that the trend in interest rates is downward worldwide? No, of course not, not for the tiny sums involved in real-world terms. That claim by Reeves - which is how she generates a bogus claim of inflation risk - is absurd.
Let's get real here: why would markets have wanted to create such an issue over such a small sum? There is no logical reason for them to have done so.
There would be absolutely no gain for them from doing that. In particular, pushing up UK interest rates as Reeves suggests likely (beyond the levels the Bank of England has already inflated them to) reduces the value of City bond holdings, and I can't see anyone wanting that.
And exchange rates are ultimately not influenced for long by short-term interest rate changes. They change because of altered trading conditions e.g. Brexit, and changes in productivity. I am not saying rates have no influence, but let's not overstate it.
So, the two real questions to ask are, firstly, who told Reeves she would crash the markets unless she cut the winter fuel allowance and left children in poverty, and, secondly, why was she daft enough to believe them?
If it was her advisers who told her the economy was in peril when it so obviously was not, she should sack them.
Time for a rethink by the Chancellor of the Exchequer.
