Budget 2012: George Osborne's 'Granny tax' punishes responsible pensioners22 March 2012
Budgets provide a colossal amount of detail, and all the nuances of George Osborne’s third Budget are consuming a great deal of attention this morning. But if we put the details together in order to get the bigger picture, they also give clues to a Government’s broader direction. Three things emerge more clearly.
First, deficit reduction is no longer the non-negotiable priority that it was at the beginning of this Parliament. The Chancellor weakened “Plan A” last November by delaying the date of the return to surplus by two years (from 2014-15 to 2016-17). He did nothing to strengthen it yesterday. The 2012 Budget was like a pre-crisis Budget in that it included tax and spend giveaways to favoured groups at very considerable cost (including the reduction in the 50p rate). There is no reason to think that his approach to the 2013 or 2014 Budgets will be different. (Jeremy Warner had the same initial reaction yesterday.)
Second, the Chancellor’s decision to increase the basic state pension in line with earnings looks even worse today. It was always going to be too expensive. But in the light of what has become known as the “granny tax”, the Chancellor is penalising responsible pensioners (with incomes from work or savings) and favouring those who have made no such provision (via a higher state pension and protected universal benefits such as the Winter Fuel Allowance). The Chancellor is clearly brave and right to propose a later retirement age, which could go a long way to controlling the cost of the state pension. But any change of that kind will come in future years, well after the current big increases in the pension have been paid.
Third, the Chancellor reminded us that he is very keen to reduce welfare spending in order to protect spending on public services, such as health and education. He took the very unusual step of looking four years ahead, into the next Parliament, to warn that welfare spending would need to be cut by £10 billion a year if public services budgets were not to suffer. Clearly it is right to question the welfare budget. All the same, it is somewhat odd given his commitment to increase state pensions so quickly, which is by far the biggest single element of welfare spending. More importantly it takes public services off the hook. It is already clear that the services subject to greatest financial pressure (policing, local government, prisons) are the ones thinking hardest about how best to change and to deliver their services. The Chancellor should not be afraid of applying the same pressure in future, and in particular to the protected budgets of the NHS and schools.
Some commentators have criticised the Budget for being driven by the needs of politics rather than policy. I don’t think that is fair. George Osborne has said for many years that he wants to bring down the headline rate of corporation tax, for example. The concern would be that the Budget does not keep up the momentum on what remain the overriding challenges i.e. deficit reduction in this Parliament and debt reduction in the next, achieved through tighter budgets and reform.