Osborne Knows Who He Is Helping

Osborne Knows Who He Is Helping

Posted: 20/03/2014 | Author: The Political Idealist | Filed under: Uncategorized | Tags: austerity, Budget, Budget 2014, Conservatives, economics, george osborne, growth, money, pensions, personal finance, social justice |Leave a comment

Yesterday’s Budget was one designed to boost the Coalition’s standing in the opinion polls before the general election campaign begins. George Osborne is in fact a shrewd political calculator, despite the omnishambles of several of his previous Budgets. Thus this Budget made few new spending cuts: you’d have to delve into the small print to uncover the scale of pre-planned reductions, and that several new unspecified cuts have been pencilled in for the next couple of years. No, this was a budget of hidden cuts masked by tax giveaways galore.

Some of these were absolutely predictable: another penny off Corporation Tax, so large businesses now pay about half as much in Britain as in the US. Backtracking on the carbon price floor, so that green taxes are limited just as they begin to yield results. Others were not so predictable: a shake-up of ISAs (tax-free savings accounts) so that anyone can save £15,000 a year without being affected by Income Tax. Pensioners are to be wooed with the option of buying National Savings & Investments bonds paying above market interest rates.

But most significantly, Osborne has liberalised rules on pension funds. It will be easier to withdraw money from your pension, whilst upon retirement there will no longer be any requirement to buy an annuity with your maturing pension fund.  The logic behind the most radical overhaul of pensions for a generation is that, following the roll-out of the flat-rate state pension in 2017, savers can act safe in the knowledge that they will not fall beneath a minimum income in retirement. Therefore, the argument continues, the government can trust people to decide what to do with their own pensions. So if they need to dip into their pensions in middle age, they can. If they opt to draw down their pensions rather than take an annuity upon retirement, they are convered even if the money runs out.

These reforms will work a treat in tempting disheartened UKIP supporters, with a few years and a few hundred thousand pounds behind them, back to the Conservative fold. And the principle of giving people more choices as to their financial futures is a noble one. Yet the price of these benefits is more financial instability for the government, for working people and in private investment. “That’s a big claim!”, I hear you say. But consider the facts: pension and annuity providers are financial powerhouses, second only to governments and central banks. Now pension funds will have to account for much earlier withdrawals, whilst the annuity market will shrink dramatically. That means pension funds will have less to invest, and will have to make shorter-term investments. Annuities will become more expensive and specialised as only those who anticipate living for long will buy them.

If both industries have less money, they cannot buy low interest gilts (government bonds) in the bulk that they used to. The consequence will be higher costs for government borrowing- not ideal when the National Debt is set to top £1,500,000,000,000. Pension funds are the only really long-term investors other than the government, which will now have to replace lost funding for infrastructure projects.

And then, even more importantly, pensioners in the future will now have to pay a premium for annuities, perhaps the most secure pension product there is. So we face a choice of greater risk or lower incomes in retirement.

So much for this “Budget for the savers”.