Be Warned, All That Glisters Is Not Gold!

Even though the expression "a dead cat's bounce" is not a very nice way of describing any sort of economic exercise or outcome, if only because it is a highly distasteful image for any caring pet owner to contemplate, but given that the Conservative Party's entire approach to central financial planning is to make it as unpalatable, divisive and inequitable as humanly possible, then perhaps a wholly ugly and unpleasant image is entirely necessary to describe a wholly ugly and unpleasant party.

 

The reason for mentioning this particular American expression, is that it has been used recently by an economic commentator with specific regard to George Osborne's latest budget measures, including the proposal to allow pensioners to release a percentage of their accumulated private pensions funds, which can then be used for paying off their mortgages, buying a separate annuity, investing in property, or whatever else they might choose to do with their own hard earned monies. Of course, on the face of it these changes will be great news for those hundreds of thousands of pensioners who have been responsible enough, or fortunate enough to have saved towards their own pension provisions, outside of the state pensions that everyone is entitled to. However, any suggestion that Mr Osborne has introduced such changes purely for the benefit of the pensioners themselves is entirely wrong, simply because, as with any such government measures, there will inevitably winners and losers, as the changes begin to roll out across the country.

 

Clearly, those pensioners who choose to release their accumulated funds will benefit, but only insofar as their fresh monies do not cause them to breach their personal tax thresholds, after which normal tax deductions would occur, a calculation that undoubtedly played a part in Mr Osborne's decision. Other potential losers from these pension changes are thought to be both personal financial advisers and of course the annuity industry generally. According to some investment analysts, the changes introduced by the Chancellor could prove to be disastrous to the industry, as hundreds of thousands of pensioners defer or cancel their planned annuity investments, to the extent that the annuity markets might see falls of between 80-90% in new investments being purchased.

 

Some less charitable commentators have accused the Chancellor and the Coalition of essentially stealing future tax revenues to pay for today's tax giveaways, as well as using temporary Treasury revenues, to pay for permanent and ongoing giveaways, a clearly unsustainable fiscal strategy in the long-term. Even though a significant number of people will almost certainly spend their pension "windfall" on the right sorts of things, including annuities, mortgages and property, others will not and will undoubtedly use the opportunity to buy the sorts of services and products that will help energise the wider economy and that should prove to add a political benefit for the Coalition in the short-term.

 

Everyone should be clear that Mr Osborne's budget is and was a political budget, one that was designed to offer the maximum of benefit to the specific voter groups that the Conservatives and their Liberal Democrat allies will hope to target in the forthcoming elections, both at European and national level. However, everyone should also be clear that this offer of "jam today" for pensioners, young families and the aspirational middle classes is a temporary truce during the austerity war that the Conservatives have fought in the past, are fighting at present and will undoubtedly fight in the future.

 

Part of the problem for the Conservatives and their Liberal Democratic allies, as well as for any future Labour government is that, as much as they try and control the nation's purse strings, events elsewhere, in the Far East, in Europe or in North America, can often contrive to undo any good that British governments might try to impose on the country. According to a large number of economic experts and in clear disagreement with George Osborne, Britain's current mini-boom, or slow economic recovery is not in the least bit sustainable, simply because it is being fuelled by cheap money, government backed schemes like "Help To Buy", an increasingly low-paid labour force and now another government sponsored scheme to release private pension monies into the economy. Rather than encouraging personal savings and investment, the mark of a financially healthy economy, the UK is going the other way, where a growing number of workers are having to spend more and more of their limited incomes on feeding, housing, clothing, heating themselves, with little if anything left for that rainy day that inevitably comes around.

 

Although most experts agree that personal credit levels are currently much lower than they have been in the past, there is some evidence to suggest that personal credit is beginning to rise, especially in terms of unsecured loans and credit card debt, both forms of borrowing that have proven to be disastrous for the economy in the past. Lending on property is also said to be on the rise, as the "Help To Buy" scheme and other private property investors begin to buy up the limited housing stocks that's available. More worryingly perhaps are the warning from the Bank of England that interest rises are inevitable, possibly within the next 12 months, so not a case of "if", but of "when" and "by how much".

 

Despite the optimistic words coming from Mr Osborne and his Treasury team regarding the country's national debt and the deficit, most people agree that the government is still spending £10 billion each month that it doesn't actually have, which is said to be around the same amount of money that the last Labour government was borrowing each month in 2007. So despite four years of austerity, of scrimping and saving, we're pretty much where we were to begin with, despite the tens of thousands of job losses, the swingeing wage cuts, the spending freezes, we're still as broke as we were seven years ago, which doesn't seem much like progress at all!

 

Even though he might be horrified to hear the comparison being made, some experts have likened George Osborne's policies to those of his Labour predecessor, Gordon Brown, in that he is attempting to replace government debt with individual personal debt, whether that's through the Car Scrappage Scheme, the Help To Buy Scheme, the Pension Release Scheme, or through the sale of what were formerly publicly owned assets.

 

The prevailing ideological policies within the current Coalition government believe that there are several ways to reduce the levels of public indebtedness affecting the country, including economic expansion, by increasing tax revenues and reducing welfare. Additionally, government can also increase direct taxation, allow inflation to increase, thereby reducing the value of the existing debt, as well as encouraging private sector debt, by inviting private equity investment. As has been mentioned previously on this blog, (I Wonder What Would Happen If?) there are alternatives methods of increasing economic activity within the UK, without sucking money out of the economy, by borrowing for growth, as opposed to scrimping for survival, but that seemingly flies in the face of the Coalition's current thinking on the matter.

 

With the underlying promise of several more years of austerity facing the country, in the event that either Labour or Conservative parties are re-elected to national office in 2015, the future does not look bright for those millions of people who have been struggling thus far. For those who are unfortunate enough to be on welfare, in low paid employment, elderly or infirm, the prospect of another four or five years of Labour or Conservative austerity can hardly be regarded as welcoming. No doubt in the short term, those pensioners who are fortunate enough to have accumulated a private pension pot that they've now been given permission to access will be grateful for the extra monies that they receive, although the reported £30-40,000 that most will access to is hardly a life-changing sum, especially once the tax man and all of the other advisers have taken their own personal share of it. Like they say, all that glisters is not gold; and despite what Mr Cameron's government might be hoping for, it is hard to imagine that the recently announced Pension Release Scheme will actually turn out to be the defining political strategy of this particular government's long term economic planning. For the individual pensioners concerned, one can only hope that most of them will choose to use their monies wisely and leave it where it will do them the most good, in a long term annuity.