Coalition tinkering on family tax and pensions is too little too late

THE foreword to the coalition’s mid-term review could have been written in the early 1970s. Perhaps this is not surprising. Policymaking tends to lack a sharp edge in coalition. Compromises must be made, and this can lead to bad decisions. Changes to student fees are a prime example. Most students will pay a lot more for their education, but the government will save very little money because of the complex system of subsidies that has been introduced to buy-off the Liberal Democrats.

But it’s not clear whether the Conservatives would have done better alone. Changes to child benefits, introduced yesterday, were their decision and they’re a shambles. There is a clear case for abolishing child benefit and using the £12.5bn in savings to create a system of transferable tax allowances to lift families out of tax. Instead, the government has bottled it and played around at the edges. Its reforms create huge effective marginal tax rates for families with one earner on over £50,000 a year, as well as discriminating against single-earner couples.

To complicate matters further, the government has now proposed tax relief of up to £2,000 a year to assist working mothers with the costs of childcare. In other words, yet more tinkering, with stay-at-home mothers implicitly discriminated against. A better solution would have been to deregulate the sector to drive down the costs of childcare – now some of the highest in Europe. Since the mid-1990s, the number of child minders has fallen by nearly 50 per cent, after the last Labour government pushed up the costs of training and the bureaucracy associated with being registered.

There is also no clear direction over infrastructure. When in opposition, the Conservatives promised to build a high speed rail link to Birmingham to compensate for their opposition to an extra runway at Heathrow. But this just replaces a project that would have been financed by the private sector with one that will be planned and guaranteed by government. We have also heard mutterings that tolls will be introduced on new roads. But which hotel chain would decide to only charge for new rooms? Either tolls are a good idea or they are not.

So, what should the coalition have done in its relaunch? We cannot expect it to become coherent overnight. But the government should recognise that the state is too big, the role of the family in providing for its own needs – especially in old and young age – is too small, and that there needs to be a decisive change in direction. We should also expect rigorous economic analysis of policy before implementation.

Yes, we need to build new infrastructure. But it should not be a process led, directed and financed by the state. The planning system should work with the grain of the market. Those affected by new building should be compensated. The private sector should finance and bear the risk of new projects, and road use should be properly priced.

We also need to transform health, long-term care and pension provision. As in many OECD countries, we have designed a system by which the taxes of the working generation pay for the old-age provision of the retired, and we are sleep-walking towards disaster. When it comes to pensions and long-term care, the coalition should be enacting reforms so that needs are provided for by the family and through saving.

Unfortunately, we are unlikely to see any of this. With regard to long-term care we will see some fudged implementation of the Dilnot review, whereby the state contributes even more towards total care costs than it does at present. When it comes to pension provision, increased private sector saving is the last thing on the mind of the government. It is hammering the last nails in the coffin of the ability to contract out of the state pension (a policy supported even by 1970s Labour minister Barbara Castle), and it has nationalised the assets of the Royal Mail pension scheme. The proposed flat-rate state pension will be simpler, but this will be partly financed by using money that people would have saved in private sector schemes. This is short-termism at its worst.

While producing coherent policy in these areas, the government needs to look again at family tax and benefit policy. Reform here has been too timid. People should pay less tax, they should receive less in benefits and the state should be smaller. These 17 words should dominate the thinking of the coalition at its half-way point.

Philip Booth is professor of insurance and risk management at Cass Business School, and editorial and programmes director at the Institute of Economic Affairs.

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April 22, 2014, 2:25pm