The magic money tree is back

One of the unfortunate consequences of the restoration of winter fuel payments is that voters' faith in the magic money tree has been restored.   Shake it hard enough and it will deliver!

Pensioners, of course, are much more likely to vote and those over 55 voting exceeded those under 55 at the last general election.    

The Government has suffered political pain for little fiscal gain.  Ironically, although I will be (rightly) taxed on the payment I receive, my partner will receive it tax free.

The policy change encouraged more pensioners to apply for pension credit which is a good if unintended outcome but it reduces the fiscal benefits even further.

Why did the Government do it?   I think they were genuinely spooked by the state they found the public finances in and thought this would be a current financial year win.

It also means that no one is likely to challenge the triple lock although it has delivered pensions £800 higher than they would otherwise be because of the earnings link.

Its defenders will say that state pensions are lower in the UK than elsewhere in Europe, but private pensions are higher.   Not everyone has them, but that is why we have pension credit.

This policy change will encourage backbench Labour MPs to demand retreats on benefit payments and qualifications which means that it will be difficult to avoid tax rises in the autumn.

Growth outlook is gloomy

The Office of Budget Responsibility is expected to publish growth forecasts today that will show those that Labour was working on were hopelessly optimistic. No suprise there.

Many independent analysts have been calling for some time for a body like the OBR. Of course, how independent it really is will be the subject of debate. But, unlike politicians, it does not have an incentive to make out that things are better than they really are.

The boom revenues from taxation are unlikely to return. Public sector net debt is forecast to rise from 36 per cent of national income in 2007-8 to 75 per cent in 2004-15. This alone would raise interest payments to close to 2 per cent of national income.

Moreover, these figures do not take into account the effect of an ageing population on public sector pensions, state pensions and the NHS. Nor do they take into account payments on PFI projects which often have a duration of thirty years.

Retirement ages and life expectancy have got completely out of kilter. However, these are evidently not going to be tackled soon and the Government has no evident appetite to means test free bus passes or winter fuel payments.

We are in for a period of slow growth, rising unemployment and reductions in public services. Whether the public are really ready for this is questionable.

Facing up to hard choices

Talking the talk is one thing but walking the walk is another. For all the talk of facing up to hard choices, politicians are shirking chances to reduce public expenditure. Pensions and other benefits are going up by 2.5 per cent next spring. The Financial Times estimates this will make state pensioners 4 per cent better off given that there is a negative RPI.

The 'inflation rate or 2.5 per cent whichever is higher' rule was introduced in 2000 when there was a political storm when New Labour increased pensions by only 75p. The public finances were in a healthier state then, whilst holding back the increase now would save a substantial £5bn. But no party wants to be seen squeezing pensioners, a sizeable slice of the electorate with a high propensity to vote, in the run up to a general election.

Now the influential NIESR has pitched in with an argument that the retirement age should be raised to 70 by 2015: Retirement . The NIESR said that the structural budget deficit was running at an unsustainable level of 6 per cent of GDP.

The alternative to a pension age rise was freezing public sector pay for five years whilst losing 120,000 jobs a year for the same period; a 7p increase in basic tax rates; and an expansion in the VAT base to include everything but food and children's clothing.

The Office for National Statistics has reported that government borrowing rose to £77.3bn in the first six months of the financial year - more than double the debt racked up in the same period last year - as tax revenues tumbled by 10 per cent.

Such a sharp and sudden increase in the pension age would not be politically feasible. But then some hard choices are going to have to be made. At some point the phoney war on public expenditure will come to an end.

Is working longer the answer?

Conventional answers to the crisis brought on in the public finances by the recession are some mixture of increasing taxes and cutting public spending, generally more of the latter.

Now in a paper written for the National Institute of Economic and Social Research by Ray Barrell, Ian Husrt and Simon Kirby, it is suggested that each year of additional working life would cut the budget deficit by 1 per cent of GDP after 10 years and in time reduce government debt by 20 per cent of GDP.

Boosting average working lives by three years would pare back the budget deficit by 3 per cent of GDP and cut government debt by 60 per cent of GDP, which the institute estimates is the cost of the current crisis.

Interestingly, compared with earlier recessions, employment among older workers is holding up better than for other age groups. Of course, it may be that the depth of the recession and the impact on their pension pots incentivises them to work longer.