Why Osborne’s "granny tax" makes sense

It is right for older people to contribute to deficit reduction.

Today's newspapers are full of predictable criticism for George Osborne's only Budget surprise - removing the higher tax allowances enjoyed by people aged 65 and over. The Chancellor has bungled this announcement, slipping it into the budget statement as a 'simplification' when it is clearly a tax rise of around £200 a year for millions of pensioners. But is it really such as a bad idea?

Older people have been relatively protected from the spending cuts imposed by the coalition. The young have taken the brunt of the pain, seeing an end to their educational maintenance allowances and the scrapping of the Future Jobs Fund. Youth unemployment has topped 1 million, the highest since records began. Working families have already seen their budgets stretched as tax credits for low earners are frozen and support for childcare reduced. Many older people enjoyed windfall gains from the house price boom that has priced many younger families out of the market.

This is not a crude argument that pits young against old. But as the population continues to age, putting extra pressure on public services, parties on all sides will have to make tough choices about tax and spend. Asking older people to contribute to tackling the deficit and shoring up the country's tax base in the long-term is not unreasonable. This is particularly true if we bear in mind that only a fifth of pensioners are poor - retirement no longer means the life of poverty that it might have a hundred years ago when the higher allowances were introduced.

"Granny tax": which pensioners lose out?


Removing the age-related allowances also makes sense because, on average, it takes much more from better off pensioners. It is true that the wealthiest fifth of pensioners do not lose much. They are not entitled to the higher allowances, which are reduced as income rises above £24,000. But IPPR analysis shows that the poorest fifth also lose very little. Most have incomes below the allowance so will not be affected by the freeze. The chart above shows that the biggest losses will be felt by the second richest fifth of pensioner households (those in the 4th income quintile). They are more likely to have two pensioners with incomes above the allowance but below the income limit.

Osborne's pleas of simplification have not played well, but he is right that age-related allowances add huge complexity to the tax system. This is important because it means that many pensioners do not even claim the higher allowance they are entitled to. An official report in 2009 estimated that 3.2 million older people failed to claim the extra allowance they were entitled to, which is over half of all older taxpayers. There are simpler and better targeted ways of supporting pensioners struggling on low incomes, that do not rely on people claiming complex allowances.

Kayte Lawton is a Senior Research Fellow at IPPR

Kayte Lawton is senior research fellow at IPPR.

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Autumn Statement 2015: George Osborne abandons his target

How will George Osborne close the deficit after his U-Turns? Answer: he won't, of course. 

“Good governments U-Turn, and U-Turn frequently.” That’s Andrew Adonis’ maxim, and George Osborne borrowed heavily from him today, delivering two big U-Turns, on tax credits and on police funding. There will be no cuts to tax credits or to the police.

The Office for Budget Responsibility estimates that, in total, the government gave away £6.2 billion next year, more than half of which is the reverse to tax credits.

Osborne claims that he will still deliver his planned £12bn reduction in welfare. But, as I’ve written before, without cutting tax credits, it’s difficult to see how you can get £12bn out of the welfare bill. Here’s the OBR’s chart of welfare spending:

The government has already promised to protect child benefit and pension spending – in fact, it actually increased pensioner spending today. So all that’s left is tax credits. If the government is not going to cut them, where’s the £12bn come from?

A bit of clever accounting today got Osborne out of his hole. The Universal Credit, once it comes in in full, will replace tax credits anyway, allowing him to describe his U-Turn as a delay, not a full retreat. But the reality – as the Treasury has admitted privately for some time – is that the Universal Credit will never be wholly implemented. The pilot schemes – one of which, in Hammersmith, I have visited myself – are little more than Potemkin set-ups. Iain Duncan Smith’s Universal Credit will never be rolled out in full. The savings from switching from tax credits to Universal Credit will never materialise.

The £12bn is smaller, too, than it was this time last week. Instead of cutting £12bn from the welfare budget by 2017-8, the government will instead cut £12bn by the end of the parliament – a much smaller task.

That’s not to say that the cuts to departmental spending and welfare will be painless – far from it. Employment Support Allowance – what used to be called incapacity benefit and severe disablement benefit – will be cut down to the level of Jobseekers’ Allowance, while the government will erect further hurdles to claimants. Cuts to departmental spending will mean a further reduction in the numbers of public sector workers.  But it will be some way short of the reductions in welfare spending required to hit Osborne’s deficit reduction timetable.

So, where’s the money coming from? The answer is nowhere. What we'll instead get is five more years of the same: increasing household debt, austerity largely concentrated on the poorest, and yet more borrowing. As the last five years proved, the Conservatives don’t need to close the deficit to be re-elected. In fact, it may be that having the need to “finish the job” as a stick to beat Labour with actually helped the Tories in May. They have neither an economic imperative nor a political one to close the deficit. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.