Winter fuel cut savings will be far less than Reeves expected, new analysis finds

Rachel Reeves has been warned that her cut to pensioner winter fuel payments risks saving hundreds of millions less than anticipated, in a new blow to her attempts to close the hole in Britain’s finances.

The chancellor and her Treasury team are already re-examining parts of a plan to crack down on non-dom tax status over concerns that it may not raise any money.

However, the Observer has seen analysis suggesting that the projected £1.4bn savings from her highly controversial cut to winter fuel payments are also in doubt.

Reeves has had to fight a fierce rearguard action to defend the cut, which was expected to remove payments from more than 10 million pensioners in England and Wales.

Only those receiving pension credit will be entitled to the payment this winter. The chancellor told Labour’s conference last week that she would not duck tough decisions in order to repair the public finances. The party leadership later lost a union motion calling on the government to reverse the measure.

But a new analysis suggests that a surge in claims for pension credit since the cut was announced means that any savings could be significantly lower than the Treasury had anticipated. In just eight weeks, applications have increased by 152%.

Analysis based on official government data suggests there have already been 45,000 extra claims for pension credit since the measure was revealed.

Research from Policy in Practice, a consultancy working with local authorities to alert eligible pensioners of their rights to financial support, suggests that the extra amount the Treasury had expected to spend on pension credit could be hit as soon as this week.

On current trends, the analysis suggests there could be 158,000 more claims than anticipated by the pension credit deadline in late December, costing an additional £246m.

However, because claiming pension credit also opens up a series of other benefits for those claimants, the total costs could be up to £700m more than expected.

Any fall in the savings from the winter fuel cut will make Reeves’s task even harder before the budget on 30 October, already expected to contain a series of politically unpalatable decisions deemed necessary to raise cash.

“It’s great news that more pensioners are getting the financial support they need,” said Deven Ghelani, director of Policy in Practice. “The increased income for some of the country’s poorest elderly citizens can have wider benefits, providing much needed relief during a cost of living crisis. We have seen unprecedented demand.“While this means the change is unlikely to save the Treasury as much money as it hoped, it has meant a life-changing boost in income for hundreds of thousands of pensioners living in poverty.”

A Treasury source said they did not recognise the figures. A government spokesperson said: “We want people to get the benefits they are entitled to, which is why the government is working hard to drive up pension credit uptake. We are committed to supporting pensioners – with millions set to see their state pension rise by £1,700 this parliament through our commitment to the triple lock.

“However, given the dire state of the public finances we have inherited, it’s right that we target support to those who need it most.”

The Guardian revealed last week fears that the Office for Budget Responsibility (OBR), the public spending watchdog, may conclude that its non-doms clampdown would not raise any money as a result of the super-rich leaving the UK. The plans are not expected to be completely abandoned.

Labour had hoped to raise a further £2.6bn over the course of a parliament by closing non-dom loopholes, including £1bn in the first year of the changes.

The news comes before a politically fraught budget that is set to define the early stages of the new Labour government. Treasury officials have been scrambling to find savings. Reeves has been clear that it will contain tax rises, while ruling out increases to the headline rates of income tax, national insurance and VAT.

Related: Reeves could change fiscal rules to allow more capital spending, say sources

Loopholes in inheritance tax, often exploited by the wealthy, are among the measures thought to be under consideration. Capping agricultural and business reliefs could also save £1.4bn a year. A Treasury spokesperson said they would not comment on speculation.

Reeves will seek to couch her statement as an investment budget, however. It may include a reworking of fiscal rules to allow more public borrowing, alongside measures to encourage more private financing of Britain’s ailing infrastructure.

Relaxing the way debt is measured, to take more account of the assets created for the state by public investment, has long been a popular idea with some economists. Reeves told Labour’s conference that it was “time the Treasury moved on from just counting the costs of investment in our economy to recognising the benefits too”.

Any change will lead to accusations from the Tories that she is breaking a pledge not to change fiscal rules made during the election campaign. “It is hard to avoid the suspicion that the government is attracted not by any theoretical advantages of a change in the debt rule, but by the fact that it would allow for significantly more borrowing for investment,” the Institute for Fiscal Studies said last week.

City sources said that there was an appetite to invest in British projects including new roads, schools and hospitals. But investors are pushing for a new body to oversee a fresh wave of public-private deals to avoid the acrimony, expensive legal actions and bad publicity of the private finance initiative launched by the New Labour government after 1997.