Policy Mistakes Continue
by Dr. Ros Altmann
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- Rate cuts hurt confidence and are a stealth tax on pensioners – the effect is like cutting state pension by £10 a week!
- Pension credit scandal – Government is stealing money from pensioners
- VAT cut was actually a new stealth tax
- Government panic measures may make the downturn worse, not better
I have been warning that the Government’s policy response will not revive the economy, that cutting VAT would be wrong, that cutting interest rates from already very low levels will make little or no difference and that, in fact, such panic measures make our economic difficulties worse, not better.
I stand by those warnings.
The policy response is disastrous for many groups and we need a much more carefully thought out package of measures. When will the Government get a grip? We need to target help on areas that have been neglected in the rush to help banks at all costs. For example:
- Bring back 10p tax band. This would help all taxpayers, and especially lowest earners
- No more rate cuts – cutting interest rates is like cutting the state pension for millions of pensioners. The reduction from 5% to 1.5% in just 3 months is like reducing the state pension by £10 a week for anyone who saved just £15,000! That is a stealth tax on pensioners and will not boost the economy.
- Reform pension credit and means test assumptions – the Government still assumes people earn 10% interest on their savings, when rates are nearer 1%. This is like stealing benefits from lower income savers
- Acknowledge that VAT cut was a waste of time and money. In fact, it is a stealth tax, as councils (and some retailers) have failed to pass on the cuts the extra money has just gone back to public coffers
Pensioners are the big losers from yesterday’s rate cuts. The reduction from 5% to 1.5% in just 3 months is like reducing the state pension by £10 a week for every £15,000 that someone saved. If they have £30,000 of savings, this is like cutting the state pension by £20 a week! There are 12 million pensioners and more than half of them have savings, but their income is being cut. That will not boost the economy.
Not only do the medium income pensioners lose out because they earn less on their hard-earned savings, but the Government is also denying them pension credit because it has refused to recognise that their savings income is cut.
Pension Credit means tests do not look at the actual amount people earn on their savings, but look at how much savings they have and then just assume people are earning 10% a year (yes, 10%!) interest. Even after recent rate cuts with many savings accounts paying less than 1% interest, the 10% assumption remains.
This is robbing pensioners of their benefits. It MUST change urgently. I call on all MPs to insist that the Government adjusts pension credit payments immediately to reflect the dramatic reduction in interest rates and alleviate some of the damage it is causing to savers. In fact, cutting rates from current low levels could make the economic outlook worse, not better. Firstly, it will hurt confidence, since people are being given the message that the Government is panicking and resorting to desperate measures, which will depress people’s desire to spend money. Secondly, pensioners are spenders, not savers, they need their money to live on and any cuts in their savings income will cut their spending too. There are around 8 million pensioners with savings and as they cut spending, this will damage economic growth.
It now turns out that the VAT cut was actually a stealth tax increase. It was never going to boost spending, it cost retailers huge amounts in changing their pricing structures and it is wasting billions of pounds in lost revenue. However, it turns out that most local authorities have used the VAT cut as a stealth tax. They have not reduced the fees they charge for their services, so they are merely pocketing the extra 2.5% instead of passing it on!
We need a carefully thought out, intelligent and better-targeted response to this crisis. So far, most of the policies are either not helping or are making things worse. If we want to get loans to businesses, then we must do so directly, rather than throwing money at the banks and cutting rates in the hope that something might start to happen. The rate cuts are not going to work. Once interest rates hit very low levels, just cutting further is not the answer.
When a patient is sick and the medicine does not seem to be working, the sensible doctor will either change the treatment, or give things time to work. However, the Government is just trying to keep on doubling the dose in the desperate hope it will suddenly work, when evidence suggests otherwise.
For all our sakes, I hope that a more intelligent policy response will soon be forthcoming and that MPs will force changes through to adjust means test calculations and to take over bank lending directly for a while, rather than leaving it to banks who are desperately trying to rebuild margins.
Dr. Ros Altmann
Watching the Government’s response to the crisis is so awful. Rate cuts from these already low levels are another mistake and may make the situation worse, not better. The VAT cut was useless, as I warned beforehand, but has been used as a stealth tax for councils who did not pass the cut on! I am calling on MPs to demand action on pension credit means tests, since they still assume people are earning 10% (yes, 10%) on their savings and therefore denying help to those who have seen dramatic falls in their income. This policy is like cutting the state pension by £10 a week – it’s madness!