It’s a tough gig being a politician in debt-plagued Europe in 2013. Your problem: how to cut the living standards of voters whom you need to re-elect you? Our UK politicians are achieving this by following the principles of 17th century French minister, Jean-Baptiste Colbert, who said that “the art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing”.The Cypriot Government meanwhile is seizing part of people’s bank deposits. This tax is deemed necessary to save the banking system. There is lots of hissing. You might think such a thing could never happen in the UK. But it is happening all the time, in a much less visible – and therefore more politically acceptable – way.
Like Mediterranean countries, Britain is also heavily indebted with the Government continuing to spend more than it collects in taxes every year. This pile of debt is a brake on the economy’s growth and means low interest rates must be maintained. There are three ways to be rid of debt: 1. Create growth…but this would mean short-term pain for voters and politicians dare not take the measures needed. 2. Default, or just say to our creditors we are bankrupt and cannot re-pay you…but this would lead to Greek-style economic collapse. 3. Repay your debts, but sneakily, with devalued money.
For our politicians the third option is the least-worst. It’s default-by-stealth but it doesn’t look and feel like default. The Government gets to borrow at interest rates below inflation. So it borrows £100 today but re-pays only £99 tomorrow. The creditors lose out. Understandably politicians never openly admit this is the game But it is being pursued, with George Osborne saying in the recent Budget that the Bank of England can “look through” above-target inflation levels and new governor Mark Carney saying that a bit more inflation is not such a bad thing.
So far, so clever. But who pays for this? Firstly those with savings (who are often the over 50’s). When inflation is above interest rates, savings lose value in real terms. Wealth is effectively confiscated through inflation in order to pay off the debts of banks and the Government. It can’t really be any other way as savers are the only ones who have any money left. ‘Fiscal drag’ does the rest – the Government keeps tax allowance levels frozen and inflation drags increasing numbers of people into higher income and capital gain tax bands. Sound familiar?
Secondly pensioners also pay. Pensions are supposed to go up with inflation each year – if they didn’t, pensions would lose their value (for instance 7% annual inflation would halve the real value of a pension after just ten years). As economist Ros Altman recently warned:
“The purpose of inflation uprating is to protect people’s income against inflation. If you devalue the index which is used then the protection is taken away.”
But that is exactly what the Government is doing. In 2011 the Government changed the indexation basis for public sector pensions, retrospectively. The Consumer Price Index (CPI) replaced the Retail Price Index (RPI). The Government says CPI is a fairer measure.
In fact it leads to a massive reduction in people’s pensions. For example, someone with an annual pension income of £10,000 might receive nearly £273,000 over a typical 21-year retirement, with CPI inflation of 2%. But the Treasury’s Office for Budget Responsibility says that in this example RPI could run at 3.4%, increasing the total pay-out to nearly £320,000. The substitution of CPI for RPI will cut the average doctor’s pension by 15%.
But the gap between RPI and CPI grows if inflation gathers pace. And higher inflation is now the goal of politicians in all countries with big debts. Of course, it makes sense to for politicians to move the inflation-index goalposts before inflation is cranked up.
A rather worrying headline recently appeared in the Financial Times: “Government to revisit pension reforms deemed too unpalatable a decade ago”. Steve Webb, Coalition pension’s minister, said he wanted to “reduce the regulatory burden” on private sector final salary pensions (similar to the NHS Pension) by letting them scrap any protection against inflation. Worrying because what happens in private sector pensions today tends to feed into public sector pensions tomorrow.
If anyone is feeling sorry for the poor savers and pensioners, maybe there will be less sympathy in the future. A subtle shift is taking place in the way the old are viewed in our country. As two columnists in the Financial Times recently argued:
“These silver surfers are all baby-boomers: arguably the most financially blessed generation in history. Those born in the post-war period are entering retirement with: Larger final-salary pensions than any subsequent saver could hope for; Properties that have soared in value by several hundred per cent, or more; Mortgage debt that was wiped out by high inflation”.
And:
“For the first time in half a century, young Britons embarking on their careers cannot expect to be any better off than their parents while those approaching retirement have never had it so good”.
The old, who draw generous pensions and often have high levels of savings, are being re-defined – no longer cuddly grandma, more a wicked witch sucking the financial lifeblood from the young! It is easier to penalise the wicked old witch. But we’ll all be old one day.
Pensions and in particular the NHS Pension are going to come under increasing attack in the years ahead. Because we are British, it will be polite and subtle, but no less deadly.
David Bowker
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