READ IAIN IN THE HERALD AND SUNDAY HERALD
It took about three minutes for the Chancellor, George Osborne, to announce that this was yet another budget for those mythical “hard-working families” of Britain.
In fact, this was more for the hard-voting pensioners of Britain. Rarely has a budget been so blatantly targeted at the people who tend to vote in elections – older people and the middle classes – and against those on low incomes and benefits, who tend not to.
The theme was all about encouraging savers, but a particular kind of saver will benefit from the chancellor’s main measures: those with a cool £15,000 in cash a year to tuck into their tax-free ISAs. Then there are the pensioners with large pension pots who will no longer have to pay 55% tax on cash they take out of it above the lump sum. Small businessmen get generous tax reliefs on investments. They even get a freeze on malt whisky.
But those depending on welfare have little cause for celebration. They have a real terms cut across the board, a further £12bn to be taken out of welfare spending and new and permanent cap on all benefits of £119bn. Forever – unless an act of parliament lifts the cap. This will hit many low income workers who have been claiming housing benefit or child tax credits. They are too poor to benefit much from the increase in the tax threshold to £10,500.
However, welfare cuts will not affect lucky pensioners, who account for more than half of the welfare bill. They retain their triple lock guarantee that pensions will rise by inflation, average earnings or 2.5% whichever is highest. The pensions reform package unveiled yesterday is radical and has been hailed by campaigners like Professor Ros Altmann. No longer will it be necessary for those retiring to take out annuities that guarantee an income for life – a very small income. Annuity rates have halved in the last decade, which has left many older people savings rich but income poor.
Take a pensioner who has made sacrifices throughout his or her life and saved £100,000. That would only deliver an income of £3,000 a year at current annuity rates. However, it is a lot of cash, and now pensioners can take it out any time they want, only having to pay tax at the marginal rate. Suddenly they will have money to play with.
That’s great news for the cruise industry, who owe the Chancellor big time, and for the car industry because many retirees like to buy a new motor. Flat screen TV makers and other luxury goods manufacturers will also increase sales. Indeed, this pensions policy is designed to boost the economic recovery by pumping new money into the high streets. And the exchequer isn’t left out either. The government calculates that so many pensioners will draw down cash from their pot, that tax revenues will rise by up to £1bn.
But it may only be a short time fix. The reason annuities used to be compulsory was to prevent pensioners spending all their money in the first five years and having to fall back on the state thereafter. The Chief Secretary to the Treasury, Danny Alexander, says he isn’t concerned about this anymore because of the recent abolition of means testing and the introduction of the new flat rate pension.
Even if they spend, spend, spend, pensioners will still get the same pension as everyone else. It’s a clever policy and a highly attractive one to those with enough money to put aside for a pension. Millions of British workers don’t because they are on incomes that are so low they qualify for state help.
This Budget was all about creating the right climate for a Conservative victory at the general election in 2015. The housing bubble is to be inflated even more by extending the help to buy scheme for new houses to 2020. The Chancellor also had an eye for the independence referendum, warning that a fall in North Sea Oil revenues will mean the equivalent of £1,000 loss per Scottish family. However, he also made clear that he is committed to implementing the reforms proposed by Sir Ian Wood, which would unlock up to 24bn barrels of oil worth £200bn in revenues.
The Scottish government say this should be going to those same Scottish families after independence.
Labour leader Ed Miliband had little to say directly about yesterday’s Budget – in fact he hardly referred to it in his response to the Chancellor’s speech. He dismissed it as budget “for the few and not the many” by the “same old Tories”. He condemned the Chancellor’s failure to do something about the “cost of living crisis”, and the fall in wages, which he calculated at £1600 per worker since the Tories came to office. He challenged the Tory front bench to rule out cutting the top rate of tax from 45p to 40p. Neither the Chancellor nor the Prime Minister, David Cameron, responded.
It was a difficult pitch for the leader of the opposition, who of course did not have sight of the speech beforehand and therefore had little time to prepare a response to the headline pension changes. He also had to contend with the reality of the economic recovery, and the revised growth forecasts which are now up to 2.7% for 2014. The triple dip recession that Labour, and many economists, had forecast, had not materialised. Indeed, UK growth is now higher than in Germany, Japan and even America.
No one seems quite sure why the UK economy has bounced back so eagerly from the longest and deepest recession in over a century – but it has. Clearly, cheap money has played a part, as has the printing of money by the Bank of England. The economic recovery has largely been driven by increased borrowing by consumers and the boom in the property market. It is a sugar rush recovery based largely on credit, and while manufacturing is growing again, there are still very profound imbalances in the UK economy, most notably the huge level of UK consumer debt – rising to £54,000 per household. And UK government debt is also still rising too, toward 79% of GDP in 2015.
But that is for the future. For the time being, the government is pushing hard on the accelerator in order to create a wealth effect for the 2015 general election. Pensioners will get access to their cash reserves; families will see the value of their houses increase, and savers will feel they have finally been rewarded. As for the rest of us? Well, there’s a penny of a pint and bingo tax has been halved, so rejoice.