In my last post, I looked at the context in which the dividend tax credit was cut. Many had expected such a move, seeing the tax system as distorting investment decisions.
The advice given to the Chancellor by civil servants shows them working hard to produce their best predictions about what might happen when the change was announced, the impact on pension funds, and ways the policy could be implemented.
Advice given in June 1997 estimated that the actuarial value of pensions would fall by £67bn and that the stock market would fall just over 7% on the news (there was uncertainty about this, with some larger falls not ruled out). On these assumptions, the annual cost to pension funds would be a maximum of £4.9bn in one year but usually at or below £4bn until 2007/8 when it would fall. When Gordon Brown announced the move of course, the market actually rose on the day, by 0.45%.
Many funds were in surplus and some employers were taking 'pension holidays' ie cutting contributions because the pension funds if anything appeared to be overfunded. The Treasury estimated that the total surpluses added up to approximately £60bn overall. Ministers were advised that, with risks, “…the likely outcome is that pension schemes should be able to cope with the change.”
Cutting the dividend tax credit and cutting corporation tax (which happened at the same time) together formed one way of reforming public finances and encouraging investment. The context was a UK economy with a reputation for high inflation, high unemployment, high interest rates, and high public debt.
After the change happened, UK shares rose 50% before falling. Between 1999 and 2002, the Treasury states, around £25obn in value was lost by pension funds because of falling equities.
Some companies that had taken pension holidays could not resume or increase payments because they were no longer making enough money. Lower interest rates and higher estimates of lifespans increased pension liabilities.
Labour responded with a powerful pensions regulator and the Turner Commission on pensions.
The wider lesson from this debate is that there is a narrative being put about by Conservatives and others that portrays Gordon Brown as against the City and business, in favour of tax and spend for its own sake, and to be less than frank about it.
Labour should not be taken in by this narrative, accepting it and just reacting to it.
There is another narrative. It is that the Chancellor has put the public finances into good order, channelled billions to the poor and disadvantaged, into health and education, and supported business and the City.
It is a pretty good record - in terms of both the numbers and the priorities. This is the narrative we should be working from.