25 October 2018
The Budget: Pension Pilfering?
Increased spending needs to be financed.
By Frank O’Nomics
Am I reading too much into this? Budgets normally take place on a Wednesday at 12:30pm. This year the Chancellor has moved the timing to a Monday at 3:30pm. The choice of date had (don’t laugh) supposedly been shifted so as not to clash with an announcement on Brexit negotiations (I thought I said don’t laugh), but the timing of later in the day is harder to explain – unless it is so that, towards the end of his speech, Mr. Hammond wants to announce something sensitive enough for it to be better revealed after markets have closed.
Expecting too much in a Budget from a minority government which struggles to pass any legislation is probably unwise. Nevertheless, the commitment to increase NHS spending and areas of public sector pay leave the Chancellor in a position where he will need to find money from somewhere. An improvement in public finances (of anything from £5bn to £13bn depending on who you believe) will help to some extent, and it does appear that any commitment to a balanced budget in the medium–term was finally put to bed when we were told that austerity had ended- meaning that it is quite likely that an element of spending increase will be funded by a rise in government borrowing. Nevertheless, the Green Budget from the Institute of Fiscal Studies has spelt out some harsh arithmetic realities and it seems clear that Mr. Hammond will be looking to find some additional cash. The most likely target is pensions.
News that government borrowing was at its lowest for 16 years in the first half of this year means that, taken together with higher than expect income tax, VAT receipts and corporation tax, if we mechanically extrapolate over the rest of the year, the budget deficit will be £11-13bn less than the Office for Budget Responsibility forecast in the spring. On the face of it this should give the Chancellor more room for manoeuvre next Monday. However, it is very possible that only £5bn of the improvement will persist given the erratic nature of government spending and, even with £13bn extra, finding the £20.5bn for the NHS by 2023, while achieving a zero deficit by the mid-2020’s, is going to be very tough. The IFS estimates that an additional £19bn will need to be raised by 2022.
So where will Spreadsheet Phil look to find the money? Increasing income tax VAT or National Insurance would run contrary to manifesto pledges and Tory party ethos. Alcohol and tobacco duties could rise to generate some additional revenue, but fuel duty is likely to remain frozen. The IFS suggests that Council Tax could be increased on more expensive homes, a move that could generate £8.5bn, but this could be difficult given that many such homes are owned by pensioners who may be asset rich but cash poor, and it would very likely see a backbench rebellion. That leaves an obvious area to visit once again – pensions tax relief. Successive Chancellors have chipped away at the benefits of pensions savings, despite the widely acknowledged need to ensure that our ageing population does not have to fall upon the help of the state in retirement. The point is that it is still very attractive to set aside money for your pension, and that the benefit accrues disproportionately to higher earners, who get relief at 40% rather than the 20% benefit for basic rate taxpayers. Overall the relief is thought to cost the Exchequer around £39bn, a sum described by the Chancellor as “eye-wateringly expensive”. One way to access some of this cash would be to cap the level of relief at 20% or 30%. 30% would fit well with the relief offered on EIS and VCT investments and still leave a strong incentive to save for retirement. In addition, the cap on annual contributions, currently £40,000, could be reduced yet again on the basis that anyone wealthy enough to be able to do this does not need any encouragement from the government. There are other ways for the government to claw back cash from pensions. Currently bequeathed pension funds are exempt from inheritance tax, which encourages the wealthy to use everything except their pension to finance their retirement. The IFS points out that increasing taxes on the elderly has a strong rationale as they are much more likely to be using the services of the enhanced NHS.
If the Chancellor wishes to maintain his commitment to a balanced budget, it is hard to see that the end to austerity is as close as Mrs. May claimed. The alternative is to push the target back and borrow more money. Whatever Mr. Hammond says, that increase in government debt seems very likely and it will only be contained by the extent to which money can be raised from elsewhere. Yes, changes in council tax, and the imposition of national insurance on the earnings of those over the pension age are possible, but the sitting duck target is to reduce the benefit of saving for your pension.
This story has already seen a reaction, with Zurich reporting flows into pensions running at 98% above average in September, as savers try to get money in ahead of any change. Former pension minister Sir Steve Webb has argued that cuts to pensions savings relief would be a mistake at a time when people should be being encouraged to save more rather than less for their retirement. The question is, does Mr. Hammond look at the short-term benefits to public finances, or the long-term costs of more elderly people needing state support? In politics the short-term has a tendency to win the argument. You have been warned.