Clegg threat to block any further welfare cuts unless Cameron agrees to tax wealthy pensioners’ benefits

by Stephen Tall on April 25, 2013

It’s 18 months since Nick Clegg first publicly aired the idea that some universal benefits given to better-off pensioners should be means-tested — an idea that’s found favour with two-thirds of Lib Dem members.

There have always been three problems with the idea.

The first problem is that means-testing is bureaucratic and potentially expensive. However, there is an easy way around that: treat their cash value as income, and tax this income at the appropriate marginal rate, as proposed by CentreForum last year. Pensioners with annual incomes below the personal tax threshold would be wholly unaffected; those above it would pay only in proportion to their income.

The second problem is David Cameron’s personal promise at the last general election to protect such benefits:

cameron pensioner pledge 2010

It was a pledge he angrily re-asserted during the televised leaders’ debates in 2010:

“We will keep the free television licence, we will keep the pension credit, the winter fuel allowance and the free bus pass. Those letters you’ve been getting from Labour are pure and simple lies … They make me really very, very, angry.”

The Lib Dem leadership will argue that the proposal to tax such benefits isn’t be a breach of this promise. Here’s today’s Independent:

Liberal Democrat ministers say that taxing or means-testing the special benefits for older people would not breach David Cameron’s pledge at the 2010 general election to maintain their winter fuel allowance, free TV licences and bus passes. Taxing winter fuel payments and TV licences would save about £250m a year and affect 1.5 million old people, while restricting them to poor pensioners who qualify for the pension credit top-up would save £1.4bn a year. … One Lib Dem minister said: “Taxing or means-testing the pensioners’ benefits would not mean getting rid of them. So, David Cameron would not be breaking any promises.” Iain Duncan Smith, the Work and Pensions Secretary, is thought to be prepared to curb some pensioner perks but Downing Street has repeatedly said Mr Cameron is sticking to his previous pledge. It is not yet clear whether the Prime Minister is open to the formula being suggested by the Lib Dems.

The third problem is that pensioners are the most powerful group in the electorate: quite simply, they bother to vote in numbers that younger generations just don’t. It’s why the Coalition introduced the ‘triple-lock’ that’s increasing the state pension (accounting for almost half the total welfare bill) by nearly 20% in real terms between 2010–11 and 2017–18.

Ironically, it was this week that the Labour-leaning Fabian Society urged that better-off older people should pay tax at the same rate as younger people on similar incomes; yet only a year ago the Labour party was in uproar at just such a proposal, the so-called ‘granny tax’. It’s a brave party which will propose a policy easily seized on by opponents in that way again.

It is, apparently, easier to impose a benefits cap than it is to try and tax a millionaire’s fuel allowance.

* Stephen Tall is Co-Editor of Liberal Democrat Voice, a Research Associate for the liberal think-tank CentreForum, and also writes at his own site, The Collected Stephen Tall.