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UK Budget 2013: Public Sector – 1, Private Sector – 0

UK Budget 2013: Public Sector – 1, Private Sector – 0

The 2013 budget has been revealed with a couple of surprises that balance each other out without actually making a dramatic change. Thankfully, the Chancellor resisted the temptation to fiddle around with pension tax relief or the amount of tax-free cash that can be claimed upon the crystallisation of a pension. The rumours that had flowed freely through the industry of these changes were found to be false.

However, despite the need for stabilisation in the pensions’ landscape in order to allow people to plan with confidence, the Chancellor insisted on a few tweaks just to stop the industry becoming complacent. Thus the pension annual allowance is to be reduced to £40,000 in the 2014 / 2015 tax year and the arrival of the flat-rate state pension is brought forward one year to 2016.

Of these two changes, the second is the most interesting. The move to a flat-rate pension is a key part of the overhaul of the pension system, which will cope with increasing longevity and is a vital support for the whole auto-enrolment process. By introducing it a year earlier, the Chancellor is accelerating the move to the full system, thereby increasing the confidence of people who are auto-enrolled that the money they save will not be wasted.

This augurs well for the government’s pension strategy and demonstrates a level of commitment that is heartening. There would seem to be a determination to increase the level of private sector pension saving to ensure that future governments will not be under pressure to increase spending on the elderly due to increasing longevity.

However, the Chancellor left the entire area of public-sector pensions unaddressed. In this, the Chancellor ignored the huge liabilities building up in the public sector pensions’ area and the effect these are having on the extent of borrowing that will be required in the future.

As I’ve stated in previous blogs, the liabilities that are building up are the elephant in the room of government spending. Nobody wants to talk about them but they are growing and will ultimately affect the Chancellor’s ability to bring the deficit under control.

By ignoring the issue today, the Chancellor has missed an opportunity to begin the process of getting these liabilities under control. The longer he waits, the harder it will become to start the process. There are enough examples in Europe of how debt can suddenly spiral out of control and how quickly a country can become insolvent when the extra taxes required to fund liabilities drives down the economy and the overall tax take.

It is to be hoped that we all won’t live to regret the Chancellor’s decision to delay what can only be described as the inevitable reining in of the public sector pension pay bill.

Tom Murray

Twitter: @TomMurrayDublin or @Exaxe

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