WeeklyWorker

04.04.2014
Buy-to-let boom?

Osborne’s plans for election victory

This year’s budget was meant to make older voters feel good and keep the housing bubble inflated. Eddie Ford looks back to March 19

George Gideon Oliver Osborne on March 19 delivered his penultimate budget before the general election - and didn’t you know it? Supposedly looking after the “makers, the doers and the savers”, he reeled off a series of inexpensive but headline-grabbing measures all deceitfully designed to give the impression that we are finally moving out of the age of austerity and into the age of … well, maybe not plenty, but certainly better times. Feeling good, or at least OK-ish, you will then do your patriotic duty in 2015 and vote Tory - or so the game plan goes. And it might work.

Thus the point at which people start paying income tax will be raised to £10,500 from April next year, and the threshold for 40p income tax will rise from £41,450 to £41,865 next month and by a further 1% to £42,285 the year after. Of course, as Osborne has precisely calculated, many older voters - who have seen their savings eroded by historically low interest rates - will be 40p rate taxpayers. So here we have a crude attempt to stop them flaking off to the United Kingdom Independence Party. After all, in 2010, turnout among the over-65s was 76% - whilst it was a meagre 44% among the under-25s. If Osborne can secure enough votes from this vitally important electoral cohort, that could possibly win the 2015 election for the Tories.

Yes, true enough, the Institute for Financial Studies has calculated that the 1% rise in the threshold will drag more people into the higher rate bracket - rising from 3.3 million in 2010-11 to 5.3 million in 2015-16, therefore increasing the general ‘tax burden’ rather than reducing it.1 But what the heck - if it gets the Tories re-elected then everything is fine and dandy.

Final nail

Without doubt though, what attracted the most attention - whether approvingly or disapprovingly - was Osborne’s fairly dramatic changes to the way pension funds are structured. It was described as the “final nail in the coffin” for annuities by one financial expert (an annuity is effectively a bond which pays out a fixed income for the rest of your life). Up until now, every year about 420,000 people buy annuities worth £14 billion. But due to the combination of extremely low interest rates and rising longevity, these pay-outs have been steadily dropping. Pensioners now though will be given the freedom, if that is the right word, to cash in as much or as little of their pension pot as they want - hence removing the need or obligation to buy an annuity. No more compulsory annuitisation.

As part of these pension reforms, the amount that can be taken out as a lump sum has been increased five-fold to £10,000 and you will be able to almost double the total pension savings you can take as a lump sum to £30,000 (for those who have saved in a variety of schemes). A quarter of the pension pot remains tax-free on retirement, but the taxable rate on the rest will be cut from 55% to the pensioners’ marginal rate of tax - which is 20% for most. The 10p starting rate for savers will be abolished and the band extended for tax-free income from £2,800 to £5,000 - with Osborne promising that by April next year all remaining tax restrictions on access to your pension pot will have been removed. You can take out as much as you want when you want. The promised land.

There will also be a New Pensioner Bond, paying “market-leading” rates, available from January to over-65s - with possible rates of 2.8% for a one-year bond and 4% for a three-year bond, up to £10,000 to be saved in each bond. Furthermore, for the 21 million people who also invest in premium bonds, the cap will be lifted for the first time in a decade from £30,000 to £40,000 this June, and to £50,000 next year - and the number of million-pound winners will be doubled.

Inevitably, as Osborne must have known would happen, almost £5 billion was immediately wiped off the value of shares in the firms that provide these annuities - worst hit was the specialist annuity provider, Partnership Assurance, which only floated on the London Stock Exchange last June at a valuation of £1.8 billion, its shares falling 55% right after the news.

Annuities were often cited as the most hated financial product in Britain - and you can see why. Not just because of their relatively poor value for a larger number of pensioners and the fact that they die with the pensioner (they do not form part of the deceased’s estate), but also for their diabolical complexity - comparable to hedge funds and labyrinthine investment schemes of that nature. That is, they were often tied up in all sorts of wider finance packages and instruments meant to increase the value of the fund. But, of course, it does not always end up like that. It was pension funds that drove the insatiable demand for mortgage-based derivatives in the US, which in turn promoted the near exponential growth of sub-prime mortgages. From there, as we all recall, you got all the noxious crap of collateralised debt obligation and suchlike - leading to the fall of Lehman Brothers and the global banking crisis, which almost saw the complete collapse of the entire financial system: 48 hours away from the cash machines running of money.

Then we have to look at those who administer the pension funds - what was their cut? Quite considerable, thank you very much. They extort enormous fees and commissions for peddling these investments (or pseudo-investments). Just as night follows day, so a lot of the profits made out these annuities were recycled into the bonus bonanzas that we have unfortunately come to expect from those that run the various financial services - their automatic entitlement, it seems.

In other words, there was a serious problem that needed to be confronted in one way or another - no matter what government happened to be in power. Something had to change. Obviously, it was impossible for Osborne to take this on directly, as the British economy is utterly dependent on the financial services industries - ie, on the colossal tax base that it provides for the economy as a whole. A capitalist UK would not survive five minutes without the City, whatever the pathetic autarkic fantasies of left reformists, ‘official communists’ and some Trotskyists. What Osborne is hoping to create, successfully or not, is a form of ‘genuine’ competition between the different arms and sectors of the financial services, when it comes to pensions.

Of course, there is no such thing as a free lunch - as rightwing economists insist on telling us. A drop in demand for annuities will make them more expensive for those who do want to buy them. More seriously still, if sales of annuities were to collapse after the government abolishes the requirement on retirees to invest in them, there would be an attendant fall in the supply of credit from this source to companies. Meaning in turn that there would be a reduction in credit provided to the government for infrastructure projects, social housing etc. This could happen quite easily if savers in final salary schemes were to convert their pension pots into defined contribution schemes. For example, of the £1.1 trillion pounds of assets held by private-sector final salary schemes, some £290 billion is held in government bonds and £200 billion in corporate bonds. A lot of money. If those funds were forced to cut their holdings of government and corporate bonds, the cost for the government and for companies of borrowing could well rise pretty sharply - and stay high. Another credit crunch, albeit of a different sort.

Zombie dream

In reality, just like the ‘help to buy’ racket, Osborne’s pension reforms are centrally about keeping the housing bubble afloat and generating that warm feel-good factor by injecting a quick stimulus into the economy. He knows full well that pensioners will use their newly ‘liberated’ pension pots to buy property as a retirement income, especially buy-to-let investments - and, admit it, you would probably do the same. It would hardly mean you were a Rachman or property magnate. Property, when all is said and done, still looks the best investment in a country like the UK, with its obscenely skewed economy. Either that or watch your precious savings dwindle away under rock-bottom interest rates. Not very smart. Significantly, the average age of buy-to-let landlords is 53, which is 20 years older than the average age of their tenants. It is now set to get older still.

Margaret Thatcher talked of a ‘property-owning democracy’, where everyone has a stake in society. Our own front door which we can paint any colour we like. Osborne’s budget is like a zombie version of that dream, given that all measures in this direction have not had the desired end result. In fact, things are going into reverse. Thatcher’s property-owning democracy is in retreat, with first-time buyers having an average age of 37 and eight out of 10 only able to buy with family help. For the first time since the post-1945 building boom, more people now rent privately than live in social housing - the latter having shrunk by more than two million through the right to buy.

Compounding the nightmare, Inequality Briefing published a depressing report on March 20 showing the growing unaffordability of private rents - a nurse, for example, spends 78% of her net income on rent for a one-bedroom flat in London and 50% in Manchester.2 Terrifying. Young workers are being priced out almost everywhere, as property-owning is concentrated in the greedy hands of landlords, petty rentiers and indeed very large-scale rentiers. We are almost back to the situation before the first rent acts at the beginning of the 20th century, with workers at the mercy of rapacious and powerful landlords - social regression.

No matter for Osborne, however - not his concern or priority. For this captain it is Tory-inclined older people first to the lifeboats, young workers and children last - assuming they can find a boat at all. And there is evidence that Osborne’s gamble is paying off. The Tories have surged in the polls and are now almost neck and neck with Labour. A recent Observer opinion poll puts Labour on 33%, the Conservatives on 32%, Ukip on 15% and the Liberal Democrats unchanged on 10%3 - and a YouGov poll for The Sun reveals very similar statistics: Labour with 36%, Tories on 35%, Ukip getting 11% and Lib Dems languishing at 10%.4 Whether this trend will last is, of course, an entirely different question.

All this demonstrates that, contrary to some common expectations on the left, there is no reason to believe that this government is a lame duck or is heading for defeat at the next general election. No, if anything, the coalition - or at least the Tories - have a better chance of winning simply because it is up to them to lose it. They have the opportunity, and partial ability, to throw bones out and convince - or hoodwink - enough voters into thinking that a little slice of the pie is on its way.

No wonder Osborne is smirking l

eddie.ford@weeklyworker.org.uk

Notes

1. http://tinyurl.com/p9g7d2k

2. http://inequalitybriefing.org/brief/briefing-23-housing-is-unaffordable-for-most-people-in-normal-jobs

3. http://www.theguardian.com/politics/2014/mar/29/labour-support-falls-lowest-2010-observer-opinium-opinion-poll

4. http://d25d2506sfb94s.cloudfront.net/cumulus_uploads/document/9s2rknjak6/YG-Archive-Pol-Sun-results-270314.pdf