Almost exactly 60 years ago, on 16th October 1964, Britain’s new Prime Minister, Harold Wilson, made his first ministerial appointment, installing Jim Callaghan as Chancellor of the Exchequer.
Following handshakes and some mutual back-slapping, a delighted Callaghan took his leave and walked along the narrow corridor linking No.10 to No. 11 Downing Street where he was met by his new permanent secretary, Sir William Armstrong. Sir William handed the beaming Chancellor a thick file containing detailed information on the state of the British economy.
Callaghan was taken aback by the report’s shocking content. The incoming government was about to inherit a massive deficit, one that had been growing uncontrollably under the previous administration and was believed to be as much as £800 million (the equivalent of £21.8 billion today). Sterling was under enormous pressure, primarily because it was overvalued, and Callaghan’s options were severely limited. He immediately recognised that swingeing cuts in public services and sharp increases in taxation were almost inevitable.
Suddenly, the “one hundred days of dynamic action” promised by the pipe-smoking Wilson earlier in 1964 appeared hugely optimistic. None the less, in response to a journalist who suggested to him that “You cannot keep a government together by the skin of your nose,” Wilson replied, “I’ll pilot it by the seat of my pants then.”
Who said history doesn’t repeat itself?
Sixty years on, no-one is quite sure where our new Chancellor, Rachel Reeves, unearthed her £22 billion black hole – a figure remarkably similar to the (irrefutable) one with which Jim Callaghan would contend, but we can say with a degree of certainty that Ms Reeves’ response will be the same as that implemented by Callaghan. Irrespective of the size of the phantom ‘black hole’, sharp rises in taxation are widely expected when the Chancellor delivers her Autumn Budget on 30th October.
Labour’s pre-election manifesto promised a significant rises in taxes, to the tune of £9 billion, ostensibly to ‘fund growth’ but a report published by the respected Institute of Fiscal Studies (IFS) in early October believes the figure will have to be considerably higher, perhaps as much as £25billlion.
The IFS report pointed out that a higher-than-forecast rise in immigration, coupled with ‘inflation-busting’ public sector pay settlements, means that should the Chancellor wish to avoid ‘austerity’ tax increases are likely to be closer to £25 billion, not £9 billion. Accordingly, Ms Reeves is expected to increase capital gains tax as well as inheritance tax and launch a raid on pensions. She is also expected to relax existing debt rules, enabling her to borrow more.
Existing retirees and those careering rapidly towards clocking off at work for the final time are expected to feel the brunt of the government’s desperate search for money. Almost as soon as she was installed as Chancellor, Ms Reeves announced that from late October around nine million pensioners will no longer be recipients of the winter fuel allowance, worth between £200 and £300. More recently, the Daily Telegraph has suggested that Ms Reeves may use her Budget speech to announce that free prescriptions for those aged between 60 and 65 will be scrapped. The justification is considered ‘sensible’ by some in government, who believe the move will “align free prescriptions with the state pension age of 66.”
Hearing this, one pensioner echoed the thoughts of many when she asked, “What have we done wrong?”
It’s a reasonable question, particularly when we consider how the technically ‘retired’ continue to contribute to the economy. For example, an amazing 63% of grandparents with grandchildren under the age of 16 are the primary source of childcare. As childcare costs continue to soar (only Switzerland has higher costs than the UK), these caring grandparents effectively save their families a staggering £96 billion a year.
Moreover, many folks classified as being part of the Baby Boomer generation prefer to remain in the workplace. They enjoy the work they do, benefit from keeping active and are pleased to generate a modest income which prevents them from having to tap into their pensions. Given the tax rises in store, most boomers will want to remain in the workforce.
The list of potentially damaging tax-related measures that could be announced on 30th October continues to mushroom. To counter this, a sizeable number of older people are currently investigating how best to improve their finances for the long term, because let’s face it, any tax rises proposed at the end of the month are unlikely to be one-offs.
For those aged 55 and above who own a property worth more than £70,000, equity release offers several attractive financial options, not least the ability to withdraw tax-free funds from their home, either as a lump sum or as regular payments. Furthermore, equity release has absolutely no affect upon the guaranteed state pension because it’s a release of equity from your property.
According to Mark Gregory, Chief Executive of the UK’s largest independent equity release company, Equity Release Supermarket, since July’s General Election there has been a marked increase in the number of homeowners making enquiries about the process as interest rates have started to fall.
“Equity release can be an excellent option for pensioners looking for ways to supplement their existing retirement income. People are often surprised to discover that the funds they release from their property remain tax-free. This applies whether they take a one-off lump sum or prefer regular payments by way of drawdown payments” says Mr Gregory.
He adds: “It’s also worth noting that with the most popular type of equity release – a lifetime mortgage, people can continue to live in their own home, either until they die or move into residential care. During this hopefully long period of time, the homeowner also continues to benefit from any increase in their property’s value.”
By 2035, more than a quarter of the UK’s population will be aged over 65, while the number of people aged over 85 is forecast to double to 3.2 million by the mid-2040s, with one in five people living to see their 100th birthday. This ageing cohort might be seen in some parts of the Treasury as a juicy source of future tax revenue, but they should not underestimate the boomer generation and consider what happened next - 60 years ago.
The day after Jim Callaghan was appointed Chancellor, Saturday 17th October 1964, he walked back along the connecting corridor from No.11 to No.10 Downing Street. In the Cabinet Room, Wilson and George Brown, present in his capacity as head of the Department of Economic Affairs, awaited his arrival. The trio refused to discuss devaluing the pound – indeed the ‘D-word’ was even left out of the meeting’s official minutes.
This decision effectively doomed the incoming government to a long, drawn-out battle to preserve sterling’s value. New Labour MP, Edmund Dell, later wrote that “the decision made Callaghan’s task as Chancellor impossible and committed [the government] to endless difficulties and possibly destruction.”
Time alone will tell us whether the current Chancellor’s eagerness to withdraw the annual fuel allowance marked the beginning of the end for the Starmer government.
