Here in the UK, the government’s Budget just changed personal tax allowances. Over-65s can earn about £2,500 (€3,055)more than under-65s before being taxed - but from April 2013 that allowance will be frozen until it comes into line with that for under-65s.
Newspapers had a field day - ‘Granny Tax!’ - which tells you all you need to know about the politics of the UK’s demographics. This was an unusually courageous decision to face down the ‘grey lobby’ and make older Britons shoulder some of the burden of the Great Recession.
Usual practice resumed with the Treasury Committee’s Budget report, part of which looks at the policy of quantitative easing (QE). The Committee demanded that the Bank of England should “estimate the overall benefit and loss to pensioners” from QE “depending on when an annuity was purchased” - betraying an assumption that QE has depressed bond yields.
Rob Carnell, an economist at ING, has looked at QE and bond yields. His first observation is that almost 95% of the variation of UK gilt yields is explained by variation in US Treasury yields. But that just means falling gilt yields can be ascribed to Fed money printing, right?
Not necessarily. As Carnell points out, while the first announcement of QE coincided with falling yields, purchases of MBS and Treasuries “seem to have delivered a clear increase in yields”. The first half of QE2 actually reversed the fall in yields that occurred between the two programmes. Indeed, later Fed statements suggested that QE was meant to push money into risk assets and lift inflation expectations - encouraging the market to sell its Treasuries.
When the facts changed, the Fed changed its mind. By contrast, lobbyists like the Saga Group still insist that pensioners are “hit by QE” because “the more the Bank of England buys gilts, the lower gilt yields go”. Fair enough - Saga represents older people. More seriously, the National Association of Pension Funds (NAPF) - which claims to represent not only pensioners, but also those saving for future pensions - told the Treasury Committee that “annuity rates have been squashed by QE”. It despaired of “the lack of clarity around QE’s harmful side effects” - which suggests remarkable clarity that QE’s effects are indeed harmful.
Paul Tucker from the Bank of England fought against the “savers get hurt” line, pointing out that the alternative to QE was “ruination” - but even he conceded that QE “pulled down the discount rate”. And no wonder: when governor Mervyn King suggested that QE “might not have had quite such as big an effect as some people think”, the ‘granny-tax’ brigade threw another wobbly.
Our economies are recovering from perhaps the biggest shock they have ever experienced. Young people are paying for that shock - through unemployment and disappearing guaranteed benefits. Older people are paying, too, because bond yields have fallen to levels commensurate with the magnitude of the shock. QE is not the issue. The is danger that the politics of Europe’s demographics might persuade us that it is.