Ageing baby boomers make pension cheques a time-bomb

Comment: Hamish McRae

Gordon Brown's pre-Budget statement illustrated beautifully both the old fissure in politics and the new one.

Gordon Brown's pre-Budget statement illustrated beautifully both the old fissure in politics and the new one.

The old fissure - the need to reconcile demand for better public services with acceptable levels of taxation - was highlighted by the fuel-duty cuts and the additional payments to schools and other public services. The new fissure - the clash between the interests of young working people who are net payers of taxes and older, retired people who are net recipients - is highlighted by the additional payments to pensioners and the need to pay back the national debt.

But if it gave a glimpse of the changing pressures on public finances, the statement also illustrates the escape route for a lucky Chancellor. If only the economy can continue growing at its present rapid clip, it becomes vastly easier to reconcile these competing interests. And Gordon Brown is a lucky Chancellor.

The response to the fuel protests was pure politics in the sense that the numbers in public finance terms are really very small. A couple of pence a litre either way on fuel is really nothing; all those tax cuts on road transport announced yesterday are well within the margin of error that governments have to work with in their revenues. An extra half percentage point on growth and, suddenly, everything becomes all right; lose a half percentage point and the arithmetic goes into reverse.

So yes, the Government reached the acceptable limits for taxation on road transport - indeed, it breached them. But now it can pull back reasonably easily, unless the act of busting the limits has actually shifted those limits. If fuel duty had been cut in the last Budget by the amount it is being cut now, there would have been no protests. But now the cuts may not be politically adequate; we simply have to wait and see.

Similarly with the bits of additional spending. Doubtless the school heads will be suitably pleased by the additional cheques to spend as they see fit. But the big picture of the education industry remains one of a sector of the economy that feels itself strapped for cash. The portions in the internationally competitive market, the top universities, feel under enormous pressure. They are losing staff to the US and to the private sector; their people feel they are working harder and harder for increasingly uncompetitive salaries, and some are in danger of slipping down the league table of global excellence.

Yes, the Government is increasing public spending, but it may not be enough to meet expectations both of the providers and the consumers. These old divisions will not be easily reconciled, but the greater fissure is perhaps the new one. Something had to be done about UK state pensions. It was and is simply not acceptable for pensioners to fail to share, at least to some extent, in the increasing wealth of the country. It does not feel fair.

So a start has been made. But it is hard to gauge from Mr Brown's statement whether this effort to head off a pensioners' revolt will satisfy the demands or, indeed, will eventually start to increase the tax burden on working people to a counter-productive level.

Of course in the short term his "the cheque is in the post" line is an effective one. Everyone likes getting a cheque, even if they paid for it with their own money. So expect a positive response in the months running up to the next election. The fight for the pensioners' vote is going to be a crucial battleground in every election for the foreseeable future. But the real problem is not now or next year. The real problem, caused by the shrinking number of people of working age and the rising number of people of pensionable age, gets relentlessly worse and worse for another 40 years.

The cheques are affordable now, thanks to good growth and rising employment, but they will become less and less affordable in the years to come as the baby boomers retire.

So we have to prepare for this difficult time by paying back as much national debt as we possibly can. The Chancellor's aim is exactly right. He sells the idea of paying back debt by saying that this cuts interest payments and hence leaves more to spend on schools. But we have to pay it back now because we may not be able to pay it back in the future - there will not be enough of us of working age to do so.

And the rest? Growth is a terrific thing for public finances. It increases tax revenues without having to put up tax rates and it cuts the number of the unemployed, so it reduces spending. The projected surpluses, not just this year but five years into the future, are the result.

But has this Chancellor actually created growth? Surely not. He inherited the fastest-growing large economy in Europe and the economy has continued to grow well. What he deserves credit for is maintaining macro-economic stability, and that is important. But beyond that? Put it this way, he did not invent the new economy any more than Al Gore invented the internet.

So what about all those fiddly little tax changes for hi-tech companies, the VAT changes for small business, the regional development this and the share options that? Forget it. People don't start businesses because of some minute tax break for which they have to fill out reams of forms. They start businesses because they think they will make money and have fun. They want low taxes because they want to keep as much of the money as possible and they want light regulation because filling in forms ain't fun.

This man has no perception of what it is like to run a business. He has just been tremendously lucky to have inherited a very good economy and to have had the judgement not to have mucked it up.