Loan voice: minister for universities David Willetts at the Conservative Party Conference 2013. (Photo: Getty)
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Cashing in pensions, the Baby Boomers inheritance tax, and the bad maths of student fees

Peter Wilby’s First Thoughts.

In 1744, two Church of Scotland ministers, Robert Wallace and Alexander Webster, considered the consequences of premature death among their fellow clergy. They decided that dependants could be provided with annual incomes or annuities if ministers paid yearly premiums during their lifetimes and the money was invested. They just had to get their figures right: costs, investment returns and, crucially, average life expectancy of ministers and their wives. Nothing like it had been done before but the two clergymen got their estimates right to within £1 and, as Niall Ferguson observes in his book The Ascent of Money, modern actuaries still marvel at the precision of their calculations.

This was the origin not only of the Scottish Widows that pays an annuity to me and millions of others but of all modern life insurance – including pensions, which, drawing on the same principles and mathematics, protect us against the risk of longevity. Scottish Widows and other financial outfits have strayed far from their Presbyterian origins and now give most annuity holders a poor deal. However, that is an argument for better regulation, not for destroying, as George Osborne has, a model that has worked well for most of the past 270 years.

The acclaim for Osborne’s Budget announcement that in future people will be able to cash in pension funds at retirement rather than taking out annuities shows how little anybody now understands the principle of mutuality. People complain that they may not “get back” what they put into a pension fund. They are missing the point. You may not get back what you put into car or house insurance; indeed, you hope not to. A pension annuity meets the costs of long life at the expense of those who die early, just as car insurance covers the costs
of accidents at the expense of those who avoid them. It is responsible collective risk-sharing, just like the original Scottish widows scheme, which all 930 ministers then alive agreed to join. Osborne prefers irresponsible individualism.

He says that we can all be trusted to use our money wisely. If so, why have banks – with payment protection schemes, missold pensions, bogus benefits on fee-paying current accounts, and so on – found it easy to rip us off? Osborne offers financial advice for everyone at retirement. Perhaps he should require them to sit a test to show they’ve understood it.

Better off dead

Far from spreading enlightenment on financial matters, the Tories’ habit is to propagate ignorance. Inheritance tax, David Cameron says, “should only really be paid by the rich”. He therefore proposes that the threshold for inheritance tax should rise from £325,000 (in effect, £650,000 for a couple) to nearer £1m (£2m for a couple). The tax was paid in 2010-2011 by only about 6 per cent of estates. At a £1m threshold, the proportion would fall to 1.5 per cent.

Is this another example of an Old Etonian being out of touch with how little most people have? Probably not. It is in the Tory interest to pretend that a tax that hits an elite affects, in Cameron’s words, “people who have worked hard”, a category that almost everybody will think includes them.

Light debts

References to graduates carrying a “debt burden” as they pay back their £9,000-a-year course fees have always irritated me. Though students technically receive “loans” to cover the fees, the government, in practice, pays upfront and later levies a graduate tax that, like most taxes, has a threshold (£21,000 a year), below which there is no liability. If you carry on earning little enough for long enough, your debt is written off. Not many debts work like that; last time I looked, Wonga wasn’t excusing repayments because debtors’ incomes were too low.

Now David Willetts, the universities minister, admits the proportion of graduates who will never repay their full “loans” is approaching 48 per cent. This is bad news for the government, because at that level the benefits of raising fees to £9,000 are cancelled out and ministers show themselves to be worse at maths than 18th-century Scottish clergymen. Surely everyone can now see that graduates don’t carry a debt burden.

Lost cause

A Channel 5 film crew left a seven-year-old and a five-year-old alone and apparently lost in a busy shopping centre to see if adults would come to their aid. With one exception, none did. Is that because we’re uncaring or because we’re scared of being branded as paedophiles? Neither, I suggest. We’ve all learned that if we see something odd in the street it’s most likely some TV or advertising stunt. 

Peter Wilby was editor of the Independent on Sunday from 1995 to 1996 and of the New Statesman from 1998 to 2005. He writes the weekly First Thoughts column for the NS.

This article first appeared in the 03 April 2014 issue of the New Statesman, NEW COLD WAR

Photo: Getty Images
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There are risks as well as opportunities ahead for George Osborne

The Chancellor is in a tight spot, but expect his political wiles to be on full display, says Spencer Thompson.

The most significant fiscal event of this parliament will take place in late November, when the Chancellor presents the spending review setting out his plans for funding government departments over the next four years. This week, across Whitehall and up and down the country, ministers, lobbyists, advocacy groups and town halls are busily finalising their pitches ahead of Friday’s deadline for submissions to the review

It is difficult to overstate the challenge faced by the Chancellor. Under his current spending forecast and planned protections for the NHS, schools, defence and international aid spending, other areas of government will need to be cut by 16.4 per cent in real terms between 2015/16 and 2019/20. Focusing on services spending outside of protected areas, the cumulative cut will reach 26.5 per cent. Despite this, the Chancellor nonetheless has significant room for manoeuvre.

Firstly, under plans unveiled at the budget, the government intends to expand capital investment significantly in both 2018-19 and 2019-20. Over the last parliament capital spending was cut by around a quarter, but between now and 2019-20 it will grow by almost 20 per cent. How this growth in spending should be distributed across departments and between investment projects should be at the heart of the spending review.

In a paper published on Monday, we highlighted three urgent priorities for any additional capital spending: re-balancing transport investment away from London and the greater South East towards the North of England, a £2bn per year boost in public spending on housebuilding, and £1bn of extra investment per year in energy efficiency improvements for fuel-poor households.

Secondly, despite the tough fiscal environment, the Chancellor has the scope to fund a range of areas of policy in dire need of extra resources. These include social care, where rising costs at a time of falling resources are set to generate a severe funding squeeze for local government, 16-19 education, where many 6th-form and FE colleges are at risk of great financial difficulty, and funding a guaranteed paid job for young people in long-term unemployment. Our paper suggests a range of options for how to put these and other areas of policy on a sustainable funding footing.

There is a political angle to this as well. The Conservatives are keen to be seen as a party representing all working people, as shown by the "blue-collar Conservatism" agenda. In addition, the spending review offers the Conservative party the opportunity to return to ‘Compassionate Conservatism’ as a going concern.  If they are truly serious about being seen in this light, this should be reflected in a social investment agenda pursued through the spending review that promotes employment and secures a future for public services outside the NHS and schools.

This will come at a cost, however. In our paper, we show how the Chancellor could fund our package of proposed policies without increasing the pain on other areas of government, while remaining consistent with the government’s fiscal rules that require him to reach a surplus on overall government borrowing by 2019-20. We do not agree that the Government needs to reach a surplus in that year. But given this target wont be scrapped ahead of the spending review, we suggest that he should target a slightly lower surplus in 2019/20 of £7bn, with the deficit the year before being £2bn higher. In addition, we propose several revenue-raising measures in line with recent government tax policy that together would unlock an additional £5bn of resource for government departments.

Make no mistake, this will be a tough settlement for government departments and for public services. But the Chancellor does have a range of options open as he plans the upcoming spending review. Expect his reputation as a highly political Chancellor to be on full display.

Spencer Thompson is economic analyst at IPPR