David Willetts is President of the Resolution Foundation, a Conservative peer, and author of ‘The Pinch: How the Baby Boomers Took Their Children’s Future‘.
This week’s tax and benefit changes are a significant moment for the Government. Benefit changes for working-age families are based on historic inflation in the year to last September 6.7 per cent. That means they sound large compared with current inflation, now falling fast, even if they are only a catch-up to restore the real losses from inflation.
However, older people get a hefty 8.5 per cent increase for the state pension, taking it to £221 per week. That higher increase for the pensioners is the effect of the triple lock. When the increases were set last autumn, pay was rising faster than prices so pensioners get more.
The triple lock has been an extraordinary dividend for pensioners. Since 2010 it so happens both prices and earnings have gone up by about 46 per cent. However, the state pension has gone up by 60 per cent, way ahead. But the basic benefit rate for working-age families have gone up by 30 per cent – significantly less than prices.
That shift in the balance of benefit spending between different age groups is hard to defend, and signals something about political priorities. There could and should have been a broad strategy since 2010 of increasing benefits broadly in line with earnings applied equitably to both pensioners and working-age families.
Jeremy Hunt has balanced this extra help for pensioners with the chunky cuts in employee national insurance contributions. These don’t help pensioners as they don’t pay them in the first place. Working-age families with young children are also getting extra help with childcare costs as well. That is a welcome recognition of the need to do more to help hard-pressed working families.
However, there were similar packages from John Major in 1996 when a child care voucher scheme was introduced, and from Gordon Brown in 2008/09 when free childcare places for every two-year-old were announced and then focused on low-income families. To put it mildly, those are electorally discouraging precedents.
Pensioners are caught by the freeze in the income tax threshold. The Government gets grief for this use of fiscal drag to boost its tax revenues. This is a dramatic reversal of the policy of the Coalition of increasing the personal tax allowance to take more people out of income tax. That policy was extraordinarily expensive as it lowered everyone’s income tax bills – though the gains for the more affluent were offset by a complicated set of threshold freezes and means-tested tax allowances.
At the end of the current planned freeze in income tax thresholds, their real value will be back pretty much to where they were in 2010 before the Coalition started increasing them. If personal tax thresholds had steadily increased in line with prices and earnings over the past fourteen years. So much political hassle now could have been avoided.
Moreover, the extra tax revenues in the period when they weren’t so high would have got us close to a balanced budget on current spending. Austerity would have been finished off with the job done before the fiscal hits of Brexit, Covid, and energy price hikes.
Behind all the turbulence of changing Prime Ministers and fiscal policies the whole period since 2010 could have had a stable policy for indexing tax allowance and benefits with earnings. It would have meant pensioners not quite as well off as they are now and working-age families a bit better off. It would have been solid and unglamorous common sense, and a good basis for an affordable policy.
There were of course the enormous shocks of Covid and energy prices – both of which would still have needed emergency interventions. But it would have been clear what the long-term path was we were trying to get back to as soon as possible.
Attention would have shifted from the ever-changing finer details of tax and benefit policy which would be linked to earnings. Instead, the focus would have been on the real driver of the long-term value of earnings and benefits – the growth of GDP per head, driven above all by productivity.
That is the real source of our problems. No amount of ingenious chopping and changing of tax and benefit policy can overcome it.
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Author: David Willetts
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