Pension perks for richest blow hole in levelling up agenda
JEREMY Hunt has the fortunate political attribute of being a calming presence. You know that, when he sits down from delivering a Budget speech, markets are not going to go haywire, as they did after Kwasi Kwarteng presented his ill-fated mini Budget last September.
But now we have all had a chance to digest Wednesday’s announcements, you do have to ask: is this really going to help the Tories turn around their fortunes and win the next election?
For once, I think Labour is right with its attack line. Mr Hunt’s pension reforms amount to a huge tax cut for the very wealthy – while ordinary people have been clobbered.
Mr Hunt was not wrong to tackle the issue of the Pension Lifetime Allowance. Until Wednesday, anyone with a pension fund faced paying a punitive tax of 55 percent the moment that their fund became worth £1,073,100.
It was giving doctors – and many other workers besides – a perverse incentive to retire early, just before they were dragged into paying the tax. It was creating huge problems for the NHS. But Mr Hunt didn’t just raise the Lifetime Allowance; he abolished it, along with that 55 percent tax
HE ALSO increased the amount of money that earners can place into a pension fund from £40,000 to £60,000 – meaning many high-earners will be able to claim an extra £8,000 a year in tax relief from the Government.
Accountants were cock a hoop, as pensions have suddenly become a highly effective way of avoiding inheritance tax.
That would be all well and good if the Chancellor was not simultaneously hitting middle-earners with a huge tax rise – through a sly method known as “fiscal drag”. This is when people get dragged into a high tax rate as a result of thresholds not being raised with inflation. When the Conservatives came to power in 2010, three million earners were liable to pay income tax at 40 percent. That has since doubled to 6.1 million – and tax allowances will be frozen until April 2026. Fiscal drag is the ultimate stealth tax, earning extra billions for the state without the Chancellor having to announce a thing.
When Nigel Lawson set the upper rate of income tax at 40 percent in 1988, it was supposed to catch only the highest earners. Yet it will soon become the de facto basic rate: the marginal rate which is paid by the greatest number of people.
Nurses, teachers and middle managers: all are now to be treated by the taxman as if they were the super-rich. But the basic rate threshold, too, will be kept at £12,570 until April 2026, no matter how high inflation is in the meantime.
One of the best things the Conservatives did when in coalition with the LibDems in 2010 was to raise the personal income tax allowance, freeing large numbers of low earners from the tax system altogether.
Yet they are now being pulled back into it through fiscal drag.
Whatever happened to levelling up? The Conservatives owe their current, healthy majority to Boris Johnson’s general election campaign of 2019 which focused on offering a better deal to people who felt left behind, like forgotten towns of the Midlands and North.
It won the Tories a string of seats in what had previously been Labour’s “Red Wall”. But that is now being thrown away. Mr Hunt is playing into Labour’s hands by offering big tax cuts for the rich while thumping the low-paid.
It is not just a poor strategy for the next election. Those frozen tax allowances are already causing deep political problems.
They are fuelling unions’ demands for big pay rises, by hitting real-terms pay.
Clearly, the Government does not have the money to fund the pay rises being demanded by the unions. A 19 percent pay demand from nurses was bad enough. The 35 percent now demanded by this week’s striking junior doctors is outrageous.
BUT what Mr Hunt could and should have done is to raise tax thresholds in line with inflation, which would at least have helped to restore some of the buying power of workers’ takehome pay. Mr Hunt quite likely has only one more Budget to deliver before the next election.
Some believe that in a year’s time the fiscal situation will be so much improved that Hunt will be able to offer substantial tax cuts.
But I am afraid it may be too late by then. Voters will already have made up their minds. And besides, tax cuts on the eve of an election will look too much like a bribe.
This week’s Budget would have been the ideal time to push the levelling-up agenda.
Sadly, Jeremy Hunt has blown the chance.
‘The victory in Red Wall seats is now being thrown away’