Osborne saves himself from a pensions pile-up

On the plus side for the Tories, the main opposition party is sweating about the voters’ verdict on its new leader, Jeremy Corbyn. Uproar is becoming the norm at the weekly meetings of the parliamentary Labour party. Last week MPs were exasperated by a presentation by Jon Trickett, the Corbynite in charge of local campaigns, who seemed more preoccupied with holding on to council territory than making gains in local and regional elections on May 5.

All the more reason, you might think, for the chancellor to exploit his opponents’ disarray with a budget packed with political ploys and timebombs. But no. Because of the referendum, Osborne has been forced to proceed with extreme caution. He is discovering that he can’t afford to tease or unnerve his supporters in any way for fear that they lose confidence in the pro-European case on which his and the prime minister’s political lives depend.

The chancellor was foolhardy even to consider taking on the grey vote over pensions. Why else shanghai the BBC’s political editor, Laura Kuenssberg, into going to, er, Shanghai last week to put a positive spin on the news that he’s having to row back on the economic optimism of last December’s autumn statement ? Why else launch a consultation on pensions, and then “neither confirm nor deny” weeks of speculation about a raid on them in the upcoming budget? Why else execute a clumsy late-night U-turn several days before the final decisions were due to be taken? Why else dispatch “an ally of the chancellor” to whisper that “George has always been clear he wouldn’t do anything to damage saving”, hours after the new pensions secretary, Baroness Altmann, a former consumer campaigner, broke ranks to warn that changes under consideration for savers could remove “the natural brake on them spending their pension fund too soon”?

Rich pickings explain why the Treasury would advocate another raid on pensions. Tax relief on pension contributions is currently worth £21.2bn a year net. Hitting higher earners on 40% and 45% income tax by reducing relief to a base rate of 25% could have brought in £6bn a year. Replacing relief altogether with “pension ISAs” could have clawed back as much as £25bn .

Osborne relishes his reputation as “the most political of chancellors”, a schemer at the centre of every web in government, but this is not the first time he has fallen for a revenue-raising wheeze from the beancounters in his back office. His critics claim that he spends so much time politicking away from his desk that he is dependent on civil servants for ideas when budget time comes round.

Unfortunately, Osborne’s fondness for the big gesture is often accompanied by a tin ear for the context in which he is making it. Treasury officials were rocking with snobbish mirth when they briefed the details of what became known as the pasty tax in the “omnishambles” budget of 2012. The more recently reversed plans to cut working tax credits directly contradicted the chancellor’s claim to be on the side of “ordinary, hard-working families”. Few were impressed by either the “Google tax” or the amount that the company in fact agreed to cough up. Painful memories of that will only be inflamed by Facebook’s decision this month to start paying an unspecified amount of tax on some of its billions of UK earnings.

Tweaking the tail of the global hi-tech leviathans is all very well, but antagonising older voters was a more serious error for a savvy Conservative chancellor. Older voters are more inclined to go to the polling station, and, as the politicians keep reminding us, every vote counts equally in this referendum. Even before the chancellor’s latest threat to planned retirement incomes, the grey-haired were grumpily drifting towards leaving the EU. Not all of them: more affluent and educated voters tend to be more favourable to remaining in the union. But these were precisely the people who would have been directly hit by a raid on middle-class pension provision.

Treating pension contributions as taxable income would have recruited more voters to be angry with the government. Half a million more workers would be dragged into top-rate income tax, according to the Liberal Democrat Steve Webb, who was the pensions minister in the coalition government.

Osborne’s immediate problem is finding the cash to balance the books now that raiding pension pots is out. He needs the money urgently because of his grand promise to achieve fiscal surplus in time for the next general election. This pledge was born of his broken promise to eliminate the deficit by 2015. In fact, with the deficit halved to £75bn, the national debt will nearly double to £1.8 trillion by 2020 and he’s up against his borrowing limits for the current year.

Many economists question the wisdom of maintaining the squeeze at a time of low growth and record low borrowing costs. But unless Osborne backs down, the Institute for Fiscal Studies says he is “boxed in”, obliged to impose either “big tax rises or spending cuts with very little notice to ensure the rule is met”.

Osborne’s choices are unlikely to put the voters in a good mood. An economic downturn might scare the voters from making changes, or it might persuade them that they have little to lose in opting out of the EU.

The prime minister is already finding the campaign tougher than he expected, in large part because, against Osborne’s expectations, Michael Gove and Boris Johnson have sided forcibly with Iain Duncan Smith and the other Brexiteers. No wonder he ordered his chancellor to “play it safe” on pensions.

Even Osborne’s tin ear must be picking up the jungle drums: if a chancellor can’t craft a sensible budget, why should you believe what he says about the dangers of leaving the EU?

@adamboultonSky