Is George Osborne Really Mugging Our Grannies For Their Werther’s Originals?

The Granny Tax

Is George Osborne Really Mugging Our Grannies For Their Werther’s Originals?

In his budget speech on 21st March 2012, the Chancellor, George Osborne announced his intention to remove the separate personal tax allowance for pensioners that was introduced by Winston Churchill in the 1920s. This has sent a shockwave around the country, not least because the plan was completely unexpected. It was also thrown into sharp relief by the well trumpeted or should that be leaked decision to give top rate tax payers a 5% cut in their personal tax bills. Hence the headline grabbing term ‘Granny Tax’ that has dominated the media today and I would like to start by apologising for my use of this phrase. It has been patronisingly used in order to elicit sympathy for the aging and purportedly vulnerable victims of this tax change. The reality is, that there is more to these changes and the actual impact on the over 65s than the rhetoric being bandied about would suggest. Ros Altmann, the director of Saga issued a statement describing the removal of this tax perk for the elderly as an

“outrageous assault on decent middle-class pensioners”, another dreaded “stealth tax”.

Others will point out that pensioners have, until now, been relatively well insulated from the austerity cuts. They will point to the free television licence for all those over 70 regardless of financial status, their exemption from paying National Insurance contributions and the winter fuel allowance that is given to all pensioners where, again, wealth is no barrier to receiving the benefit. Indeed, Tory businessman Steve Norris openly admits to spending his on Claret. I wouldn’t completely support this line of argument. I can see a justification for removing the fuel allowance from the wealthiest pensioners and redistributing it to the lower income elderly who really need it. But, I also believe that such a viewpoint ignores the fact that record low interest rates which have depleted savers’ incomes have impacted on fiscally prudent pensioners.

So have pensioners been unfairly affected in this budget and is there a valid reason for this policy?

Firstly, on a positive note the weekly state pension will be increased by £5.30 but this rise won’t be effective until April 2013. With regard to tax, those aged 65 to 74 will enjoy a taxable allowance of £10,500 from April which means that their allowance is and will remain greater in the short-term than that of the working population who are under 65. The under 65s will pay tax on any income over £8105 from next financial year. For those aged 75 and over the tax allowance will rise to £10,660 at the same time. But these changes mean that from 2013 the increase in tax allowance for over 65s will be frozen. The aim, it seems, is to freeze tax allowances for over 65s until all other tax allowances have caught up. In addition, those reaching 65 after 5th April 2013 won’t receive the extra allowance at all.

The result is, that whilst no-one will have cash taken from them they won’t be as well off as they thought they would be. Critics of this move suggest that it would have been fairer to increase the under 65s’ tax allowances at a faster rate until they caught up rather than arbritarily freezing the over 65s’ allowances. They also claim that this doesn’t allow those approaching 65 to prepare sufficiently for the unexpected drop in income.

Another point for consideration is that any extra allowance is gradually removed from those with an income of between £24,000 and £29,000 with those receiving more than this having no extra allowance. So the pensioners being hit by this cut in income are sensible men and women who have worked hard all their lives, saved towards their retirement and should now be reaping the rewards of their hardworking lifestyle. They are therefore, middle and low income citizens for whom this move will have a very real impact. According to the BBC article:

Figures from HMRC show that, taking inflation into account, this will leave 4.41 million people worse off than they would have expected, by an average of £83 a year in 2013-14. People due to turn 65 after 5 April 2013 will miss out on an average of £285 compared with what they expected in 2013-14. The biggest loss is £322 that year.

According to the Chancellor himself, it was:

“a major simplification”

and

“No pensioner will lose in cash terms.”

It does however, seem to me to be a logical step given that the retirement ages are being steadily increased in the years ahead. In terms of the Government’s tax simplification strategies this is an emminently sensible move as over time we will all end up on the same tax allowances based simply on income rather than age and income. On the whole then, I am of the opinion that the move was inevitable in light of the future we face with regard to pensions and pension ages. But to remove valuable income from any low and middle-income section of society is unfair.

Is there a fairer way?

My first thought on this is a question: Why are pensioners paying tax on their pension to begin with? We pay two forms of tax when we earn, PAYE and NI which contributes to our state pension. We pay tax on our savings and when we spend our disposable income we pay tax on just about every transaction in the form of VAT. Surely there must be some point in our 3 score years and 10 at which we gain a small relief from the incessant and lifelong tax burden. Even as pensioners we would continue to pay VAT on our consumables and tax on our savings.

I would suggest that in order to restore some sort of balance any pension income is removed from tax and tax allowance calculations. This would mean that anyone over 65 would only pay income tax on any income that was not pension and that exceeded the tax allowance.

Benjamin Franklin once wrote:

“In this world nothing is certain but death and taxes.”

That may well be right, but why should we have to pay taxes until death?

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How Will The Right-to-Buy Scheme Be Able To Fund New Social Housing?

Council tenants offered £75,000 discount in right-to-buy scheme

Residents of houses could get 35% discount after five years and another 1% for each further year, up to maximum of £75,000

On 12th March 2012 the Coalition Government announced an extension of the right-to-buy scheme for council tenants. Aspects of this scheme will include a 35% discount for tenants who have lived in their property for five years with a further 1% added to the discount for each year of residency up to a limit of £75,000. According to my calculations based upon average house prices for England in January 2012 of £161,000 this would result in a potential buyer obtaining their property for £86,000 after just 17 years as a council tenant. The Government claims that this is part of a long-term strategy to both boost the underperforming property market and help fund the creation of more social housing.

How Will The Right-to-Buy Scheme Be Able To Fund New Social Housing?

At first sight this would appear to be a scheme doomed to failure from the start. If you sell one council house to build one council house then you end up with one council house! It is basic maths that we should all understand from early primary school. Then I read a comment from a fellow Guardian reader who claimed that each house sold would fund the building of two houses. So I decided to investigate further as I still wasn’t entirely convinced by the efficacy of this policy. What I discovered made for very interesting reading. In 2011 the cost of building a house was approximately £89,000 which means that even a council home sold for the full average asking price of £!61,00 wouldn’t fund two new houses. If you then factor in right-to-buy discounts, a full £75,000 reduction will mean that the funds raised won’t even be sufficient to replace the property sold. There will of course, be regional variations in property values and costs of construction but it is probably reasonable to assume that costs and values will rise and fall in proportion to each other so the result will be the same nationwide.

This raises more questions:

  1. If this scheme will result in an actual reduction of social housing how are we going to solve the current social housing crisis?
  2. What will happen to all the families being evicted from and soon to be evicted from homes owned by private landlords because of the benefits cap which will mean that deprived families’ benefits will no longer cover the rent bill.

Deprived families are being made the scapegoats for the failure of successive regimes to provide sufficient social housing. Supporters of the benefits cap which will limit financial support to £500 per week argue that it is unfair for non-working households to be living at the taxpayers’ expense in properties that working people can’t afford to purchase or even rent. And, if this applies to the minority of households who are happy to claim from the state without contributing to the economy then they do have a point. However, there are countless hardworking families who have genuinely fallen on hard times and are only in private sector housing because not enough social housing has been provided. The mix in availability of housing stock in England has changed between 2008 and 2010:

Owner Occupied = Reduction of 238,000 = 1.5%

Local Authority = Reduction of 84,000 = 4.49%

Housing Association = Increase of 123,315 = 5.99%

Private Rented Sector = 494,153 = 14.35%

Social Housing Sector Overall = Net Increase of 39,315 = 1.00%

For various reasons the drop in local authority housing has been through a transfer of property to housing associations, but overall there has been an increase in social housing of just 1% or 39,315 homes while the growth in numbers on social housing waiting lists has been many times that amount. Between July and September of 2010 more than 11,000 people joined the lists. Furthermore, according to the same January 2011 BBC report, the numbers |“rose by 72% over the last 13 years, from just over one million in the late 1990s to almost 1.8m by 2008” That amounts to an average annual rise of over 65,000 households. In addition the article referred to the forced increased use of private accommodation. This situation is now getting worse with a rise of 1090 families between the end of 2010 and the last quarter of 2011 being housed in temporary accommodation under the homelessness provisions of the 1985 and 1996 Housing Acts after 5 years of steady decline in the numbers of such households. Worse still, 1060 of these were housed in Bed and Breakfast hotels, the accommodation of last resort.

How Do We Provide Enough Social Housing?

In my opinion the answer is relatively simple but the Government won’t like it because it will mean imposing the “Tobin Tax”, a financial transaction tax on banks of .1% which would raise approximately £7.5bn to £8.4bn of revenue annually for the exchequor. This money would be used to build the social houses needed at a steady rate which would be faster than the increase of households being added to the waiting lists. The proposal would work as follows:

  • Carry out an assessment region by region and authority by authority of the housing needs.This would be updated anually.
  • Ring-fence £7.5bn of the money raised from the Tobin Tax to build the new housing stock. The income would be distributed regionally as needed according to the survey results.
  • The new homes would be owned by the taxpayer but managed by the local housing assocations. The reason behind this is the fact that according to recent figures local authorities’ housing revenue was running at a deficit each year while housing associations were ending each year with a surplus; an essential requirement for the plan to work.
  • Each year the housing associations would use their approximate surplus of £1.32bn to build new housing stock. The Government would match fund to the value of £7.5bn of the Tobin Tax revenue. The remainder of the £7.5bn above construction costs would be paid as a management fee to the housing associations. Each subsequent year the money available to fund new builds would increase because it would include the surplus revenue from properties added to the portfolio the previous year. (This would vary slightly because the match-funding percentage would have to be adjusted in order to remain within the £7.5bn limit.

Over time there would become an excess of housing stock. If there were no other social housing creation schemes in operation this plan would take 35 years to complete and the final small waiting list could be housed through the purchase and renovation of a proportion of the long-term empty homes of which there are currently 270,000 in England at an annual cost of around £.5bn. If the Government were also able to honour their promise to build 45,000 new homes per year the scheme would reach fruition in 18 years.

Some sources estimate that 130,000 families in London alone are already unable to pay the rent and this is before the benefits cap comes into force in 2013. We are facing a horrendous scenario of 250,000 children just in the Capital being evicted, forced to move away from their friends and change schools. In addition, not all those facing eviction are non-working households. Many are low income working families who will face losing their jobs because they will have been forced to live too far away from their place of employment. This will push them further into poverty and impose a greater burden on the tax-payer.

The right-to-buy scheme combined with the benefits cap fails on at least six levels:

  1. The money received from the sale of the properties will be insufficient to create new social housing fast enough and the waiting lists will continue to grow.
  2. There will be an immediate loss of ongoing revenue from the sold property.
  3. The victims of the benefits cap will have nowhere to go. The reason they were in private accomodation in the first place was the lack of social housing.
  4. Increasing numbers of families will be forced to live in bed and breakfast accomodation semi-permanently even though this is meant for emergency situations only.
  5. Evicted working households will end up claiming more benefits if they lose their jobs as a result
  6. 45000 new homes per year will never keep pace with demand and waiting lists will only increase year on year.

By using the Tobin Tax to fund new social housing it means there will be no extra burden on the taxpayer because we are not currently receiving this revenue. Additionally, a steady move of families from private to social housing will prevent the homeless family tsunami we are on the verge of witnessing. Finally, the reduction of the tax bill being spent on expensive private sector housing can be used to build more houses or redistributed throughout the economy as can the Tobin Tax once the project has been completed.

I believe that this proposal works on both practical and moral levels. It is sound financially and it redistributes wealth from the banks to the poorest in society. It would prevent the most deprived familes from being victims, yet again, of misguided and unjust policies and I recommend it for consideration and comment.

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