Is the granny tax really so unjust?

The new measures announced by Mr Osborne and immediately dubbed a “grannytax”, will affect almost half of all pensioners and raise more than £1.25bn a year by 2016. Described as a “tax simplification” by the Chancellor, the personal tax allowance for people over 65 will be frozen from April 2013, rather than rising in line with inflation. This policy was the single biggest revenue-raising measure in the budget because it will affect millions of people.

The average pensioner will lose £83 a year. But the Institute of Fiscal Studies has calculated that worst hit would be someone who is turning 65 with an income between £11,000 and £26,000 – they could be £323 worse off per year.

However, pensioners still enjoy a swathe of universal benefits. Cold weather payments, tv licence fee rebates and free bus travel are paid regardless of income.

Campaigners say that far from being penalised, older people have been sheltered from the worst of the deficit reduction strategies.

Since coming to power the coalition government has allowed universities to increase fees to a maximum of £9,000, and cut Education Maintenance Allowance (EMA) payments to sixthformers. Meanwhile, youth unemployment has reached record highs and many councils – under pressure to save money – have chosen to cut services aimed at children and younger people such as SureStart centres and youth clubs.

Liam Burns, President of the NUS said: “a generation is being hit by record unemployment, the rising cost of being a student, ever increasing rent costs, squeezed education and training opportunities and huge cuts to financial support while they study, all of which were ignored by this budget.” And he highlighted in particular the downside of “short-sighted planning” which prevents the government from investing in “the next generation of innovators”.

Liz Emerson of the Intergenerational Fund (IF) said that although the coalition government’s latest budget has “made some attempts to rebalance taxation across the generations”, many of the measures introduced will actually hit the younger generation “from all sides”.

She told Channel 4 News: “no one seems to understand that there is a collision of different debts coming together: from housing, rent, education, government debt, to taxation”. What concerns the IF in particular is that all these issues affecting younger people are coming at a time of austerity.

However pensioners might justifiably point out that other government policies have hit them disproportionately. The Bank of England’s ongoing programme of quantatitve easing helps keep interest rates low, benefitting those with mortgages. But those same low rates penalise people living off savings which are now not keeping pace with inflation, and have drastically reduced the amounts being paid out in annuities to those retiring now, compared to annuity levels a few years ago.

Past experience has shown that young people are notoriously reluctant to take part in elections, and indeed their protests against measures such as increased tuition fees, although noisy, have been politically ineffectual. So why the political gamble of the granny tax, given former Prime Minister Tony Blair once described angry pensioners as “rottweilers on speed”?

Channel 4 News Economics Editor Faisal Islam says: “Privately some voices in the Treasury have admitted that their deficit plan so far has shied away from hitting older people compared to the young. It’s quite telling that the chancellor went nowhere arguing this justification for the so-called granny tax in his post-budget interviews today. It may be accurate, but it’s politically toxic.”

But with George Osborne warning that if re-elected in 2015, he’d be looking for another £10bn of welfare cuts on top of the £18bn already planned, this week’s battles could be a foretaste of bigger battles to come.