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Budget spending cuts questioned by IFS think-tank Pension change based on "highly uncertain assumptions"
(about 1 hour later)
How the government will pay for tax cuts announced in Wednesday's Budget has been questioned by the think-tank, the Institute for Fiscal Studies. The Budget's pension changes are based on "highly uncertain assumptions" and may lead to "market failure", according to a respected think-tank.
Its director said the Budget "will be remembered for one of the biggest shake ups in the tax treatment of private pensions". The Institute for Fiscal Studies (IFS) said the changes were "one of the biggest shake ups seen in a long time".
But he added forecasts for the impact of this change were based on "highly uncertain behavioural assumptions". But it questioned estimates about the increased tax revenue the new scheme would initially generate, and said it could create "losers".
Paul Johnson also questioned how other cuts would be funded. The IFS also queried how other tax cuts would be funded.
"A set of definite and permanent tax cuts look to have been matched by more unspecified spending cuts, some changes in the timing of tax receipts, and our old friend tax avoidance measures," he added. Chancellor George Osborne expects the pension changes to increase government revenues, at least in the first few years, because more people will be able to make taxable withdrawals from their funds.
Mr Johnson said that while liberalised pension rules should mean more tax for the Treasury as pensioners drew down taxable lump sums from their pension pots, it depended "on highly uncertain behavioural assumptions about when people take the money." The government predicts increased income tax receipts of up to £1.2bn in 2018-19, based on an assessment that 30% of people in defined pension contribution schemes will opt to take out their pension at a faster rate than via an annuity.
'Uncertain' 'More expensive'
And he said that increased choice for pensioners in the way they managed their pensions could lead to more mistakes. But IFS director, Paul Johnson, said that "depends on highly uncertain behavioural assumptions about when people take the money".
People at 60 or 65 are known to underestimate their own life expectancy and especially the likelihood of living to extreme old age, Mr Johnson explained. The chancellor's changes are partly a response to worries that annuities - the most common option for current pensions, which offer a guaranteed income for life - are not giving customers the best value for money.
He said that new policies to reduce tax avoidance were also "uncertain". But Mr Johnson said the new rules could create even bigger problems.
Tax free childcare had also "been made more generous but magically, at no extra cost," said Mr Johnson. "It will likely make annuities even more expensive for those who do want to buy them.
"So far as one can tell this just reflects new analysis resulting new estimate. How and why that happened is not transparent." "The market will become much thinner and there will be greater levels of adverse selection - only those expecting to live a long time will want to buy an annuity, thereby driving up the price.
He added: "We still lack a proper rationale and evidence base for the more than £7bn a year of public money that is now spent on childcare." "There is a market failure here. There will be losers from this policy."
Mr Johnson also said that increased choice for pensioners in the way they managed their pensions could lead to more mistakes.
People aged 60 or 65 are known to underestimate their own life expectancy and especially the likelihood of living to extreme old age, he explained.
The chancellor has dismissed fears people might "blow" their pension pots, adding that pensioners were "responsible people who are capable of making decisions about their future".
An extension to tax-free childcare has also been criticised by the IFS. The scheme has "been made more generous but magically, at no extra cost," Mr Johnson said.
"We still lack a proper rationale and evidence base for the more than £7bn a year of public money that is now spent on childcare."
And there was little suggestion in Wednesday's Budget of how such apparent give-aways would be paid for, Mr Johnson said.
'Chopping and changing'
"A set of definite and permanent tax cuts look to have been matched by more unspecified spending cuts.
"The numbers are small in the scheme of things. But we had similar observations to make after last year's Budget.
"A Chancellor focussed on the sound management of the public finances over the long run would not make a habit of repeating these sorts of manoeuvres."
The IFS also described potential revenues from new policies to reduce tax avoidance as "uncertain".
Mr Johnson praised the "consistency" in increases to personal income tax allowances, and reductions in corporation tax, but criticised "chopping and changing" in business policies like investment allowances.
Cuts in savings taxes were also welcomed, but Mr Johnson concluded the Budget still "leaves us with as little sense as we had before of quite how the very large public spending cuts still in the pipeline will actually be delivered".