Labour Claims About Threat to Pound Met With Investor Skepticism
(Bloomberg) -- Labour’s assertions that Britain could have faced financial turmoil had Chancellor of the Exchequer Rachel Reeves not scrapped a fuel subsidy for pensioners are being challenged by market participants, with one dismissing the idea as “absolute nonsense.”
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On Sunday, House of Commons Leader Lucy Powell said the savings from scrapping the winter heating subsidy for 10 million retirees were needed to avoid the risk of a run on the pound and a spike in interest rates. Reeves’ decision to means-test the benefit, which is worth as much as £300 ($394.15) per pensioner over the coldest months, saves £1.4 billion this year and was the most controversial element of £5.5 billion worth of cuts that she announced in late July.
Reeves unveiled the savings after identifying £21.9 billion of undeclared overspending inherited from the Conservative government, a claim disputed by the Tories. “If we hadn’t taken some of these tough decisions we could have seen a run on the pound, interest rates going up and crashing the economy,” Powell told Times Radio.
The Commons leader’s comments while speaking for the government drew a link between Labour’s inheritance and the crash caused by former Prime Minister Liz Truss, whose disregard for fiscal prudence two years ago caused a gilt market collapse and soaring mortgage costs. Powell said there had been “no alternative” for action because Reeves had discovered a “huge additional black hole for this current financial year, borrowing higher than anybody understood.”
Reeves and Prime Minister Keir Starmer are seeking to blame the Conservative Party for undermining the public finances during their 14 years in power and forcing difficult decisions like the fuel subsidy cut. But Michael Brown, a strategist at Pepperstone Ltd. in London, said the claim that such a small policy shift was necessary to avert a run on the pound was “absolute nonsense.”
“A lot of the rhetoric that we are hearing around this £20 billion black hole in the public finances isn’t something that markets have either in the past or now appeared particularly concerned about,” Brown said by phone. “It all very much seems part of a political strategy by the new government to come in and say, ‘Everything’s the fault of the other guys who were here before us.’”
Starmer is under pressure from Labour Party members over winter fuel payments and is likely to face angry questions on the issue this week when Parliament’s summer recess ends. The Liberal Democrats, the UK’s third-largest party, and the Conservatives have called for a vote in Parliament.
Education Secretary Bridget Phillipson, whose turn it was to speak for the government on Monday, declined the opportunity to repeat Powell’s claim about the pound.
‘Serious Consequences’
“What is clear, is if we had not got to grips with the public finances overall, there could have been serious consequences for the economy,” she told the BBC. “My understanding is that Lucy was making a wider point about the need to get the public finances under control.”
The winter fuel cut is exacerbating Labour debates about whether the new government should be prioritizing the public finances or people’s need for support in the wake the party’s landslide election victory in July. Some Labour Members of Parliament and aides have expressed concern about the signals of cutting support for a a key voter demographic instead of raising taxes on the wealthy.
The party also wants to push forward on planning reforms and changes to workers’ rights as Reeves builds up to the budget on Oct. 30, which she is warning will be “painful.” Reeves will address Parliament on Tuesday.
Brown’s skepticism about Labour’s claims about the risk to the pound was echoed by James Meadway, a former Labour Party adviser. “There would not have been a run on the pound if the government had decided against freezing a few more pensioners to death this winter. It’s £1.4 billion from a budget of £1,200 billion,” he said on X.
--With assistance from Tony Czuczka and Ian Fisher.
(An earlier version of this story corrected a reference to borrowing costs.)
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