Throughout the Budget speech that he delivered to the nation on Wednesday 16 March, Chancellor of the Exchequer George Osborne repeatedly stated (19 times in all) that his concern for “the next generation” was the guiding philosophy behind the difficult policy choices he had chosen to make. But will the measures announced in the Budget really help today’s young people?
The answer to this question will be presented in two parts: Part 1, in this blog post, will look at the some of the measures he announced which are potentially going to have a positive impact for young people; the possible negatives will be examined in Part 2.
Throughout their time in office, the Conservatives have made it clear that their main priority is to repair Britain’s public finances from the impact of the 2008 global financial crisis by eliminating the financial deficit (the difference between what the government spends and what it receives in revenues). Only when the public finances are in surplus will we be able to start paying down our national debt, which is projected to hit almost 83% of GDP in the next financial year. Deficit reduction is often cast as a moral issue by politicians and other commentators, who argue that passing the burden of such a large national debt on to future generations is unethical. Therefore, from the government’s point of view, the best thing they could do for “the next generation” is to reduce the deficit as quickly as possible.
From IF’s perspective, there is an important debate to be had about whether the injustice which would be done to future generations by handing them such a large national debt is balanced by the harm which may be caused to the present generation by government austerity measures themselves (and there is now a substantial amount of evidence to show that government cutbacks have hit younger members of the present generation far harder than older ones).
In any case, George Osborne’s interpretation of intergenerational fairness is such that doing the right thing for future generations largely means lowering the deficit; to the extent that the policy choices he laid out will achieve this aim, they can be considered beneficial to future generations. The plan which he outlined during his speech is meant to achieve a fiscal surplus by the 2019-20 fiscal year, through a combination of a further £3.5 billion in unspecific spending cutbacks and higher tax receipts (partly due to Corporation Tax changes which will enable large companies to postpone payments they would have made earlier until that year).
The politically independent Institute for Fiscal Studies has argued that, on these plans, the deficit is likely to be eliminated either by 2020 or shortly afterwards, barring huge economic under-performance. Again though, this will have been achieved by cutting total public expenditure from around 47% of GDP, when the Conservatives first came to power as part of the Coalition in 2010, to a forecast 36.9% by end of the decade. Whether future generations will ultimately think this was worth it, balanced against the reductions in long-term capital investment and cutbacks to public services which it entailed, will be a question that only they can ultimately answer.
The Chancellor’s rhetorical emphasis on “the next generation” also had two other major policy planks: accelerating the Conservatives’ major education reforms in England so that every state-funded school will shortly be on track to become an academy, and significant changes to the way earnings and savings are taxed.
As younger workers are likely to be low-paid, they should be set to benefit from a further increase in the Income Tax personal allowance to £11,500 (although, unlike working pensioners, they will still have to start paying National Insurance contributions before this threshold is reached).
The policy which may ultimately be of the greatest long-term significance for young people is the creation of the new “Lifetime ISA”, a savings vehicle which is designed to help them put money aside that can be used either to buy a house or pay for a pension. In a nutshell, a person under 40 can open one of these new Lifetime ISAs and receive a 25% top-up from the government on every pound they save up to a limit of £4,000; their savings are taken from post-tax income, but there will be no tax on the interest these savings accumulate or on withdrawals which are used for the accounts’ intended functions.
Some commentators have suggested the new Lifetime ISAs will look so attractive to young people that they will give up on saving into traditional pension schemes altogether – although a more sober analysis might conclude that it relies upon young people having the necessary funds to be able to take full advantage of the scheme, and, of course, it may stoke house price inflation if it leads to more money chasing the same supply of housing. Nevertheless, this policy stands out as the one which is likely to have the biggest impact on younger and future generations, as it could transform the way people save for their old ages forever.