All pensioners with an income of £35,000 or less a year will have the winter fuel payment restored in full after Rachel Reeves finally responded to the furious backlash to the government’s most unpopular policy to date.
But while the reversal was welcomed by Labour MPs worried about pensioner poverty and the political toxicity of the issue, there were concerns the £1.25bn price tag would mean more tax rises or spending cuts this autumn.
The decision has also emboldened backbenchers who have been pushing for more action to tackle child poverty with the government facing intense demands to lift the two-child limit, which experts blame for worsening deprivation.
After weeks of uncertainty over how many pensioners the U-turn on scrapping the benefit would affect, Reeves announced that about 7.5 million pensioners in England and Wales who missed out on the payment of between £200 and £300 last year would now receive it.
Ministers are restoring the automatic payments as a universal benefit this winter and then recouping the money when some 2 million higher-income pensioners fill in their tax returns, the Treasury estimates.
The chancellor said the government had “listened to people’s concerns” about the decision to limit the payment to the poorest pensioners last winter and was now able to widen eligibility because Labour had stabilised the economy.
The unpopular move, one of the first announcements by the chancellor after Labour’s landslide election victory last year, had raised questions about her political judgement and been widely blamed for the party’s collapse in support.
It had meant the number of pensioners receiving the payment was reduced by about 10 million, from 11.4 million to 1.5 million, with the government’s own analysis suggesting 50,000 were plunged into poverty. After the change, 9 million pensioners will benefit this winter.
The government’s reversal came despite Downing Street denying that it would make changes to winter fuel payments after the Guardian revealed that it was rethinking the cut amid anxiety at the top of government that the policy could wreak serious electoral damage.
The decision to prioritise paying the energy bills of some middle-class pensioners bolstered Labour MPs who have been urging the government to scrap the two-child benefit cap, which could lift an estimated 350,000 children out of poverty.
Torsten Bell, the pensions minister, suggested that the current rules, which limit benefit payments for families with more than two children, were not sustainable. “We cannot carry on with a situation where large families, huge percentages of them, are in poverty,” he told MPs.
Economists questioned whether the government had focused on the right issue. Paul Johnson, director of the Institute of Fiscal Studies, said: “It wouldn’t even be in the top 100 of things that I would do with my £1.25bn if I wanted to act on poverty.
“Almost none of the people impacted by this will be in poverty. Most of them will be at least as well-off as the average in the population. We know that poverty is much worse among families with children than it is with pensioners …”
Reeves brought forward confirmation of the change to the £11,500 income threshold over which pensioners are no longer eligible to the spending review on Wednesday. Officials said the new £35,000 threshold was well above the income level of pensioners in poverty and broadly in line with average earnings.
Reeves is expected to set out how she intends to fund the change in the autumn, which led to accusations from the Tories that she is in effect making an unfunded pledge, although the Treasury insisted her fiscal rules would still be met and the move would not be paid for through borrowing.
Officials said the £1.25bn cost would still mean £450m would still be saved compared with the cost of restoring the payment to all pensioners. However, it was unclear whether the figure took into account tens of thousands more people now claiming pension credit, cancelling out any savings.
Helen Whately, the Tories’ pensions spokesperson, urged Reeves to apologise to pensioners. “Let’s be clear, the government made a choice to cut the winter fuel payment. It is outrageous to claim that the economy has somehow improved since the day they made the cut,” she said.
However, the chancellor defended the move. “Targeting winter fuel payments was a tough decision, but the right decision because of the inheritance we had been left by the previous government,” she said.
“It is also right that we continue to means-test this payment so that it is targeted and fair, rather than restoring eligibility to everyone including the wealthiest.”
Party activists said the chancellor’s decision to axe £1.5bn in winter fuel payments last July came up repeatedly on the doorstep during last month’s local elections. No 10 officials feared the strength of feeling could have an impact on their broader plans for welfare changes, with previously loyal backbenchers threatening to rebel.
The option of paying all pensioners a winter fuel payment and then asking wealthier people to repay the money is a similar approach to that taken by the former Conservative chancellor George Osborne when he reduced child benefit eligibility for better-off parents.
Pensioners will also be able to opt out of receiving the payments, with about 2 million individuals in England and Wales over state pension age having taxable incomes above £35,000.
The Scottish government and the Northern Ireland executive will both receive an uplift in their funding as a result of the change in England and Wales.