Philip Booth: Pensioners should suffer their share of the cuts

Professor Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs.

The Comprehensive Spending Review (CSR) was not particularly comprehensive. It will reduce spending as a proportion of national income to the levels we had in 2007 – hardly ambitious. By 2015, the state will still be spending 45% of national income (about 40% using the government’s preferred measure which overstates the national income denominator).

One reason why the CSR was relatively lame was because two areas were effectively excluded – the NHS and overseas aid. But another large interest group also escaped scrutiny: older people.

This may not be surprising. In both the 2005 and 2010 elections, the main parties were doing anything they could not to upset older voters – indeed the Conservatives’ 2005 manifesto went to extraordinary lengths in proposing distortions of the tax system to help old people. One of the problems when the government becomes the main provider of income to older people is that, as the electorate ages, it becomes more difficult to rein spending in – there is a vicious circle rather than self-correcting mechanisms at play. The median age of active voters (i.e. those who actually vote) is already over 50 and is rising rapidly. The young do not have much chance at the ballot box these days.

So, the CSR was pretty tough on the young – student grants will go; we will have the cliff-edge removal of child benefit for those earning around £40,000; and VAT and other taxes are increasing. Meanwhile, the sacred cows that most benefit the elderly – the NHS, benefits in cash and kind, and the basic state pension are either being protected or enhanced. Furthermore, benefits to pensioners are always increased to compensate for VAT increases whereas those who are working suffer reductions in real wages.

Over the coming months, the IEA will be releasing studies suggesting how the CSR could have been rather more comprehensive. We start today with the focus on the elderly – Sharing the burden – How the older generation should suffer its share of the cuts. We propose sweeping away a series of benefits that have no real economic justification – winter-fuel allowance (which, contrary to comments I received when I wrote about this for CoffeeHouse last month, has nothing to do with the purchase of winter fuel); free bus travel (which increases local authority control of the bus industry); and free television licences. We also propose a rapid increase in pension age to 66 (with female retirement age increasing one year faster than would otherwise have been the case) and the removal of the “triple lock” on pensions which will see them rising by the higher of earnings, prices and 2.5%.

The triple lock is expensive and has absolutely no justification other than as an electioneering gimmick. It essentially means that the real increase in pensions (i.e. the increase over and above prices) will depend on some complex relationship between three variables. If we have deflation, pensioners could see their real incomes soar at unacceptable expense to the Exchequer; if inflation is 10% and wages lag prices, their real incomes will be stagnant.

The final short-term proposal involves removing the special tax concessions that pensioners have. It is well known that they have a higher basic tax allowance than the working population. Less well known is that pensioners also receive a married couple’s allowance. Whereas married young people have to suffer discrimination in the tax and benefits system, married pensioners above a certain age receive another tax allowance. These allowances are then withdrawn in a fiendishly complex way leading to pensioners having around 12 different marginal tax and benefit withdrawal rates before their income reaches £40,000 a year.

There are long-term proposals in the paper too. It is proposed that the state pension is put on a straightforward accruals basis with individuals being allowed to contract out and make private provision. The Second State Pension would be scrapped. The state pension age would also be increased and linked to improvements in life expectancy. Rumour has it – though we have seen no concrete proposals yet – that the coalition has allowed the left wing of the Liberal Democrats to take over pensions policy and implement their long-standing proposals for a citizens’ pension.

Our short-term proposals would save about £19bn by 2015 (£16bn directly in spending reductions, £3bn as a result of the withdrawal of tax concessions). I can hear the howls of anguish from some ConservativeHome readers – particularly the older ones. However, we have to detach ourselves from the idea that it is sensible to have an economic system where people send payments of taxes up to bureaucrats in one government department only to then fill in long forms to receive that money back from another government department (minus an overhead eaten up by government bureaucracy).

These proposals – together with others that we will make in the coming months – will make possible a huge reduction in taxation. This will include a huge reduction in taxation on older people. We need a tax-cutting government and a tax-cutting government needs to cut expenditure, not merely return it to 2007 levels.