Julian Knight: 'Granny tax' trick will prove to be a dead rabbit

Osborne's magician's flourish will haunt Tory MPs forced to justify the personal allowance change
  • @ukmoneyguru

Cutting the highest rate of income tax and launching an attack on the retired or soon-to-be-retired, would be described as "courageous" in Yes, Minister speak – yes, it was that bad.

With the 45p rate and the "granny tax", Chancellor Osborne was like a conjurer, producing a rabbit from his hat only for it to be stone-cold dead. No matter how much he stands there gurning and shifting in the spotlight, it's still dead and there is nothing that he can do to save the audience embarrassment.

The announcement reminded me of Gordon Brown's last Budget when he cut basic rate income tax but abolished the 10p tax band. His back benches howled with delight and the then opposition leader – David Cameron – was thrown off guard and stuck to a long-prepared and therefore totally ineffective speech.

He missed the moment and it was up to Labour backbenchers, once they had gone back to their constituencies, to understand how monumental a mess had been made. Likewise, those MPs braying their delight on the Tory benches need to understand one thing – these measures hurt their core vote and the parents of their core vote. In the year it takes to implement the granny tax and other changes – another political mistake, get it over with fast was the only way – this story has every chance of growing legs.

Fortunately for Osborne, the Eds Miliband and Balls show is not doing well – with the gimlet-eyed Balls the only politician in the UK who makes Osborne look cuddly and warm. But like the 10p tax, the opposition to this policy may come from within the main governing party. If I were a Tory MP in the shires, I'd stop checking my emails this summer and perhaps plan to hold fewer surgeries. Tory voters are going to tell their MPs exactly what they think.

Let me just spell it out again for the Tory backbenchers: The very rich, who are a tiny part of the voting public, have had a tax cut, while the elderly who have saved all their lives and vote in their millions have had their potential incomes slashed.

Now go forth and sell that one on the doorsteps, I dare you.

But why, apart from the stupid politics, is it wrong that pensioners and the soon-to-be-retired are being hit? Well, because these are the same people who have been hurt by the pitiful savings rates (kept artificially low to bail out more profligate debtors) and had their annuity income decimated by the quantitative easing programme (bailing out debtors again).

Admittedly, over the past 15 years, around a million pensioners have been lifted out of poverty, but these are not the people affected by this measure. It's those who have done the right thing; saved enough to keep an OK, but not extravagant, lifestyle in retirement and are now effectively seeing their incomes cut.

For the Chancellor to say, on the BBC Today programme, that pensioners will be better off because of a rise in the state pension from April and other benefits, that shows he's rattled. The fact is that those people paying income tax will not be claiming these benefits. And, the state pension increase only reflects inflation rises and so means that pensioner buying power will stand still.

Then there's the argument that these postwar baby-boomers hold a substantial proportion of the nation's wealth (particularly through house price increases) and therefore need to be taxed hard. They should pay their bit, the argument goes – I'd answer that they already have. And what's more, unlike younger people, they can't expand their income to meet higher inflation or taxes.

This is an attempt to build up an us-and-them argument – the same seen with public- and private-sector workers – and it won't work because the public know that most of those in their sixties, seventies and eighties aren't the super-rich in our society – unlike the 45p taxpayers.

Selwyn Lloyd, who would later become Tory chancellor of the exchequer, justified the case for a higher tax allowance for pensioners in 1949 in the middle of desperate postwar austerity. He said giving pensioners a higher allowance was "a very sound thing for the country. I do not think we shall get out of our present economic difficulties until we have re-created the belief that savings are really worthwhile."

You should have listened to Selwyn, George, and not pulled this particular dead rabbit from the hat.