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?

A

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.

Photo: Getty
Show Hide image

The Home Office made Theresa May. But it could still destroy her

Even politicians who leave the Home Office a success may find themselves dogged by it. 

Good morning. When Theresa May left the Home Office for the last time, she told civil servants that there would always be a little bit of the Home Office inside her.

She meant in terms of its enduring effect on her, but today is a reminder of its enduring ability to do damage on her reputation in the present day.

The case of Jamal al-Harith, released from Guantanamo Bay under David Blunkett but handed a £1m compensation payout under Theresa May, who last week died in a suicide bomb attack on Iraqi forces in Mosul, where he was fighting on behalf of Isis. 

For all Blunkett left in the wake of a scandal, his handling of the department was seen to be effective and his reputation was enhanced, rather than diminished, by his tenure. May's reputation as a "safe pair of hands" in the country, as "one of us" on immigration as far as the Conservative right is concerned and her credibility as not just another headbanger on stop and search all come from her long tenure at the Home Office. 

The event was the cue for the Mail to engage in its preferred sport of Blair-bashing. It’s all his fault for the payout – which in addition to buying al-Harith a house may also have fattened the pockets of IS – and the release. Not so fast, replied Blair in a punchy statement: didn’t you campaign for him to be released, and wasn’t the payout approved by your old pal Theresa May? (I paraphrase slightly.)

That resulted in a difficult Q&A for Downing Street’s spokesman yesterday, which HuffPo’s Paul Waugh has posted in full here. As it was May’s old department which has the job of keeping tabs on domestic terror threats the row rebounds onto her. 

Blair is right to say that every government has to “balance proper concern for civil liberties with desire to protect our security”. And it would be an act of spectacular revisionism to declare that Blair’s government was overly concerned with civil liberty rather than internal security.

Whether al-Harith should never have been freed or, as his family believe, was picked up by mistake before being radicalised in prison is an open question. Certainly the journey from wrongly-incarcerated fellow traveller to hardened terrorist is one that we’ve seen before in Northern Ireland and may have occurred here.

Regardless, the presumption of innocence is an important one but it means that occasionally, that means that someone goes on to commit crimes again. (The case of Ian Stewart, convicted of murdering the author Helen Bailey yesterday, and who may have murdered his first wife Diane Stewart as well, is another example of this.)

Nonetheless, May won’t have got that right every time. Her tenure at the Home Office, so crucial to her reputation as a “safe pair of hands”, may yet be weaponised by a clever rival, whether from inside or outside the Conservative Party. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.