Reeves can loosen Britain’s purse strings: she just needs to think outside the Treasury box

Pressure is building on Rachel Reeves to prevent some of the UK’s poorest pensioners being hit by restrictions on the winter fuel allowance. A plan to scrap the subsidy for all but those who claim pension credit, saving the exchequer £1.4bn, is under attack from opposition parties, trade unions and many inside Labour’s ranks.

So far, the chancellor has resisted calls to reinstate the allowance of up to £300 a year – or even to make more of an effort to ensure only the richest pensioners lose the payment, implying that she needs all the savings to help close a £22bn gap.

Many of Reeves’s critics have focused on the small gain this means for the exchequer, as part of £1.2tn of government spending expected this year.

The same accusation – that she is shaving trivial amounts from her budget shortfall – could be levelled at the many other savings Reeves has announced. Whether it is scrapping the £1.7bn tunnel planned to run alongside Stonehenge on the A303 or the £1.1bn cost next year of implementing the Dilnot report – which recommended a cap on an individual’s social care costs – they are all small in relation to the truckloads of cash spent every year by Whitehall departments.

Yet Reeves believes, and has an argument to back up her stance, that she needs every penny to bring the government’s day-to-day budget into some kind of balance, restricting the deficit to no more than 3%.

And that’s because the £22bn funding shortfall inherited from the Conservatives is only the beginning of a growing gap between government income and the costs of running a 21st-century public sector, with services that function properly and a decent safety net for those who need it.

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There is already a queue at the Treasury’s door of ministers keen to secure a deal ahead of the upcoming spending review that will keep their departments afloat, let alone meet manifesto policy pledges.

Delayed by previous Tory chancellors, the spending review is Labour’s chance to lay out its priorities for the next five years. That might be a straightforward exercise were it not for the long list of hidden costs and ticking financial time bombs that keep most ministers awake at night.

The biggest is the health department, where secretary of state Wes Streeting is coping with hospital trust deficits and GPs protesting at the lack of funds in the primary care sector.

The education secretary needs more cash for schools just as many universities edge closer to bankruptcy. At the justice department, ministers are asking how they cover the cost of the summer riots and deal with long backlogs in the courts. The list extends to defence spending, the police and more.

Then there are all the welfare programmes that must be funded because they are underpinned by new legal obligations, and that is before Reeves considers removing the two-child benefit cap.

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That’s not to say Reeves has no options. Plenty of tax breaks that benefit the richer in society can be scaled back, a commitment to pay the Bank of England interest on its loans could be ditched and investment spending could be separated from day-to-day spending. This last measure would allow Reeves to press ahead with costly investments to boost growth by increasing the amount the UK borrows without – as Liz Truss did so spectacularly – spooking international lenders.

Truss’s antics helped Labour get elected, but now that record of failure is circumscribing the Treasury’s powers. So, too, is Starmer’s two-parliament plan, which gives an excuse for procrastination and an adherence to unnecessary strictures on spending in the short term.

There are ways that the winter fuel allowance can be means-tested without affecting pensioners in the bottom half of the income scale. As campaigner Martin Lewis has suggested, the cut could be tied to higher council tax bands. Or it could be made a taxable benefit, though those with an income of more than £12,570 would lose 20%.

These more equitable restrictions wouldn’t affect the deficit in any meaningful way if a more expansive mindset was winning inside No 11.