Lax monetary policy bad for savers, Budget report says

George Osborne George Osborne said Budgets could no longer "be dreamt up in secret" by a chancellor

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The government should explore ways to help pensioners whose retirement income has been undermined by low interest rates, a committee of MPs has said.

In a report on the Budget, the Treasury Committee said "lax monetary policy" was "particularly penalising savers".

Quantitative easing had badly affected pensioners' annuity returns, it said.

MPs also said a coalition government was not justification for pre-Budget leaks. The Treasury said it would respond to the report "in due course".

'Loose monetary policy'

Quantitative easing (QE) is the process by which a central bank injects money directly into economy, when interest rates can go no lower.

UK interest rates are currently at 0.5% - the lowest level in the Bank of England's history.

Start Quote

We recommend that the government consider whether there are any measures that should be taken to mitigate the redistributional effects of quantitative easing”

End Quote Treasury committee

Since March 2009, the bank has injected £325bn into the UK economy in an effort to revive consumer spending and economic growth.

The Treasury committee said quantitative easing penalised savers by redistributing money to borrowers.

"Loose monetary policy, achieved through quantitative easing and low interest rates, has redistributional effects, particularly penalising savers, those with 'drawdown pensions' and those retiring now," it said.

"The Bank of England has argued that some of those effects may be mitigated by the increase in asset prices stimulated by quantitative easing.

"While the aggregate of savers and pensioners may have received some benefit from higher asset prices, there will be many individuals who will not have benefited."

The committee said that the Bank of England should provide an estimate of the "overall benefit and loss to pensioners and savers from quantitative easing".

"We recommend that the government consider whether there are any measures that should be taken to mitigate the redistributional effects of quantitative easing, and if appropriate consult on them at the time of the Autumn Statement," it said.

In their report they quote the bank's deputy governor, Paul Tucker, who said he had "great sympathy" for savers but argued the economy "would have been destroyed" if the Bank had done nothing.

Preserving Budget confidentiality

The Treasury committee said coalition government was "not a justification" for the early leaking of details of last month's budget.

Several details - including raising the threshold at which people start paying income tax, cutting the top rate of income tax from 50% to 45% and raising stamp duty on properties worth more than £2m - were reported in the press beforehand.

On Monday, Conservative co-chairman Baroness Warsi told BBC Two's Newsnight that the coalition arrangement between her party and the Liberal Democrats had meant more of the Budget than usual entered the public domain.

She said: "I think the coalition means that actually governments can't be as watertight as they could have been if it was a single party."

After the Budget, Chancellor George Osborne also told the BBC that the days when the chancellor "dreamt this all up in secret, and shared it with the prime minister 48 hours before he delivered his speech" had gone.

But the Treasury committee said that while a two-party government had to canvass views, Budget details should be released "in the normal way" and it was a "weak argument" to say the coalition was a factor in the leaks.

"We recommend that the government review its practices, based on the experience of this Budget, for preserving Budget confidentiality in a coalition context."

Assessment urged

Dealing with the Budget's details, the committee also questioned the impact of the decision to reduce the top rate of income tax - for those on more than £150,000 a year - from 50% to 45%.

The costs and benefits were "highly uncertain, and could be significantly more or less than the cost included in the Budget".

The committee urged "a comprehensive assessment of the effect on the Exchequer".

It also looked at the government's decision not to stop paying child benefit to people paying the 40% income tax rate - instead setting the cut-off point at earnings of more than £60,000 a year.

It said the tapering of the allowance for those on an income of between £50,000 and £60,000 would be "complex and costly to implement and comply with".

But measures including cutting the rate of corporation tax were "likely to make the UK more internationally competitive".

A Treasury spokesman said: "We will study the report and respond in due course."

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