George Kerevan: Fiscal granny bashing won’t secure our future

Economic growth and Scotland’s strong social democratic culture could see our ageing future population supported, writes George Kerevan

ANYONE who bothered to read last week’s report from the Orwellian-named Office of Tax Simplification (OTS) would soon have fallen asleep. Ploughing through its 94 pages on how to tax Britain’s pensioners is up there with watching paint dry.

Perhaps George Osborne and Danny Alexander, his Lib Dem partner in fiscal granny bashing, were relying on the OTS document to soften the blow of Wednesday’s Budget surprise that froze special income tax allowances for the over-65s. If so, they miscalculated badly. Not since an over-confident Gordon Brown abolished the 10p starter rate, has a government been too clever for its own good. Osborne and Alexander are nabbing £3bn from pensioners over the next few years. But pensioners vote early and often.

Instantly, a rattled Alexander tried to palm off responsibility, saying the move had been “recommended” by the OTS. Not so. I’m geekish enough to have read the offending document: the OTS pointed out the system of age-related allowances was fiendishly complicated for pensioners to understand but cannily eschewed making any recommendations.

Chancellor Osborne then weighed in, claiming that a freeze is not the same thing as actually taking cash from pensioners. They just don’t get extra in the future, as they would if allowances were indexed. Semantically correct, but £3bn will still end up in the Treasury coffers that otherwise would be in elderly citizens’ bank accounts. That’s a lot of money to people living on savings, especially when interest rates are at rock bottom. Oh, and did I mention that pensioners vote early and often?

Mr Osborne did not stop with freezing allowances. Buried deep in his Budget was a throwaway line that has even deeper implications for pensioners. The coalition government has already raised the age at which both men and women can start drawing their state pension to 66 by 2020, and 67 by 2028. On Wednesday, Osborne capped that by announcing he plans to link the state pension age to “life expectancy” on a rolling basis.

This is a pusillanimous way of saying that if you dare to try and live longer, the government will get its own back by raising the pension age. Average life expectancy in the UK has increased by 5.3 years over three decades. If that trend continues and is used by the government as a basis for pension age increases, then today’s young folk will qualify for their state pension at 73.

Certainly there is a demographic timebomb. The part of the population aged 65 and over will rise from 17 per cent today to 26 per cent by 2061. This puts heavy pressure on the public purse. But the numbers crunched at the independent Office for Budget Responsibility (OBR) are beginning to look very scary, and may explain Chancellor Osborne’s willingness to attack pensioner entitlements. Put bluntly, if nothing changes, the demographic trend will push public borrowing back into crisis levels from about 2025.

An ageing population adds to NHS costs and the pension bill. According to the OBR, by 2060 public spending will have to rise by the equivalent of 5.4 per cent of the then GDP to cover these costs – so a bigger economy does not necessarily eliminate the problem. Admittedly, 50 years away is a long time to forecast with any certainty. But if the OBR figure is in the right ballpark, we face a new deficit on a par with the current fiscal disaster, or massive tax rises, or a huge cut in entitlements. Knowing politicians, we can expect all three.

One can already divine in the small print of this week’s Budget documents that the government is preparing to turn its austerity programme into a permanent feature of life in Britain.

In Annex A, we are told that departmental spending, which includes money for Holyrood, will experience real cuts in both 2015-16 and 2016-17 – when public finances are meant to be back in balance. These real reductions (3.8 per cent) are actually greater than in earlier years. However, as the Chancellor was brave enough to point out, because the economy is growing so slowly, he still needs to find another £8bn or so in welfare savings by 2017. But most welfare spending has now been capped. Which leaves your free bus pass and winter fuel allowance for the chop.

But then comes a chilling clincher: “Any new policy proposals [i.e. beyond 2017] … will further reduce the resources available elsewhere. The government will be examining the cost drivers for all areas of public spending, and identifying the further reforms needed to deliver a sustainable welfare system and public services within the resources available.”

Decoded this means that after Austerity Mark #1 (2010-2017), Osborne is planning Austerity Mark #2. You can expect further cuts, starting with pensions. There is no rainbow at the end of Osborne’s fiscal road, especially if you are silly enough to grow old.

Fortunately, there is a more optimistic scenario. If the economy grew at a modest 2.5 per cent per annum, in 50 years national income would rise by 3.5 times. I suppose, at a push, most of us can buy 3.5 times more clothes, holidays and electronic gadgets. But it seems to me that, with so much extra wealth by 2060, there is a reasonable possibility of diverting resources from consumption to health and pensions. This could be done via the tax system, or through individuals insuring themselves (incentivised by… er, tax allowances).

There is a lesson here for Scotland, which is likely to see a higher proportion of elderly than England. The best argument for independence is that it will let Scotland implement economic policies that maximise growth, providing the resources to support an ageing population. At the same time, Scotland is heir to a strong social democratic culture that would provide popular backing for the fiscal transfers required to support an older demographic. Plus, we are more open to youthful working immigrants to redress the population imbalance. Sadly, such a social democratic vision is not within Osborne’s imagination.