Carl M Groves, former College Principal, and IF supporter, calls on the new government to better protect the interests of younger and future generations in the 2022 Autumn Statement.
Growth, tax and spending
Whatever else the UK Conservative Government and Labour Opposition may disagree upon they are both very committed to achieving economic growth and a balance between taxation and public spending, with government borrowing permitted only for investment purposes and to address the occasional national emergency – such as the Covid-19 pandemic.
But “balancing the budget” can be achieved in a number of different ways. Assuming that there is a budget deficit, as at present, the government may decide to reduce the overall level of public expenditure or it may decide to increase the overall level of taxation or it may decide to use some combination of the two. It may even decide to increase the overall level of public spending and increase the overall level of taxation by a greater amount, thereby achieving a budget surplus and a reduction in the nation’s overall debt position.
£50 billion black hole
The real challenge for the Government, and for the Opposition with its desire to be in government imminently, is deciding which elements of taxation and public expenditure to employ to get to their respective versions of fiscal rectitude. Given the size of the problem – the so-called “£50 billion black hole” – these budgetary decisions, individually and collectively, will have substantial social and economic consequences for the people of the UK and huge implications for intergenerational fairness.
Economic growth anyone?
The pursuit of economic growth is obviously desirable for government ministers and aspiring government ministers as it makes fiscal policy so much easier. Economic growth brings in more tax revenue without the need for new taxes or increases in tax rates and with sufficient levels of revenue income we can have both lower taxes and higher public spending, yet still be able to achieve a balanced budget. But economic growth requires improved productivity, usually as the result of a prior increase in investment, or being able to access spare or dormant economic capacity, usually from a pool of unemployed or underemployed working-age people.
Low investment levels
In the UK, however, investment levels remain stubbornly low and there is currently a shortage of labour due to a peak period of retirement within the post-war Baby Boomer generation as well as a record 7 million backlog of NHS patients waiting for essential medical procedures.
There is also a growing UK dependency problem due to the remarkable – NHS abetted – longevity of approximately 5 million people born between 1928 and 1945, the so-called Silent Generation. In effect the UK now has two substantive generations of retired people and whilst our politicians may publicly celebrate this increased longevity – “we’re all living longer” – they are unwilling to address its enormous social consequences and economic challenges for children and younger generations of adults.
With little prospect of imminent growth, the UK government is currently looking at a combination of reducing, in real terms, the size of departmental budgets (i.e. spending on public services) and increasing some taxes with a view to achieving higher overall tax revenues.
Both sets of decisions cannot fail to have intergenerational consequences. With respect to public services, the intergenerational fairness of real terms’ spending cuts, such as in education and training, health and social care, housing and transport, etc. can be determined by looking at the specific budget lines subject to real terms’ cuts and comparing them to demographic data on the usage of these same services. With respect to taxation, however, there is a remarkably simple way to ensure intergenerational fairness: that is to treat all forms of personal income in the same way. This will require reform to the tax system based upon the notion of a common personal income tax. So, how could this be achieved?
We need a “Common Personal Income Tax”
In the interests of social equality and intergenerational fairness, it is high time for all forms of personal income: wages, pensions, interest, rents, dividends, profits, and capital gains – i.e. both earned and unearned income – to be treated exactly the same within a newly defined Common Personal Income Tax (CPIT) and for the UK’s many “tax exemptions” and seemingly deliberate “tax loopholes” to be closed. CPIT should have a Common Personal Income Allowance (CPIA) below which no CPIT is payable at all. Above the CPIA limit, CPIT would be payable at a common “basic rate” and a common “higher rate/s”, which would be similar to income tax at the present time. Employee National Insurance Contributions (NICs) should be merged with Income Tax Payments within the new CPIT system with the multiple aims of simplicity and efficiency, and to fairly spread the collection of income taxes between different income levels, various types of income, and between younger and older generations. We need to obtain definitive data from the Institute for Fiscal Studies (IFS) but initial research carried out by the Intergenerational Foundation suggests that these changes to the tax system, alone, would increase government revenues by approximately £67 billion each year.
Ageing and wealth
Given that older people are much more likely to have accumulated or inherited property and investments, there is obvious intergenerational unfairness in giving shareholders and holders of so-called “wealth management portfolios” additional tax allowances, and lower tax rates, on their dividends and other investment income. Larger personal investors can also make use of a form of “trust” which allows them access to investment income without having to pay capital gains or other income taxes. Those who receive rental income (largely older people) pay the normal rates of income tax but are given property allowances and expenses’ allowances in addition to their personal income tax allowance, reducing their effective rate of tax.
In the interest of intergenerational fairness, and as a necessary source of revenue in the current fiscal environment, it is surely time to tax personal wealth in ways that cannot be easily evaded or avoided. Inheritance Tax (IHT) and Capital Gains Tax (CGT) are so riddled with “exemptions” and so-called “loopholes” that we can only draw the conclusion that the UK Treasury wishes to provide an escape route for certain types of tax payer. The most obvious starting point is to add a number of higher bands to Council Tax and to ensure that property revaluations are carried out every 10 years. The next step is to remove tax avoiding “trusts” and several other devices to circumvent CGT, IHT, and Income Tax.
3 million pensioner millionaires
Given the ever expanding life-style chasm which exists between higher-income/asset-rich pensioners and state-pension-dependent pensioners, pensioner specific benefits – such as Winter Fuel Payments and Free Bus Travel – should all be means-tested. It should not be for lower-income/asset-poor younger adults to have to pay for benefits to affluent pensioners whose career opportunities, access to high quality public services, and general lifestyle (even into advanced old age) few will ever be able to replicate. Higher-income/asset-rich pensioners are the single most affluent social group that has ever existed in the UK and today includes 3 million older people living in millionaire households.
Finally, there is a significant issue of non-compliance in UK tax matters. This requires a sincere commitment to a continuous process of simplifying the tax system and eliminating the many opportunities for tax avoidance which is written into tax law. Tax evasion, of course, is a criminal matter but tax evasion is made much easier by the UK’s complex tax rules which require the HMRC to deploy a disproportionate amount of public resource to investigate and prosecute such crimes. The Government should commit to simplifying tax rules, give the HMRC sufficient resources to do the job, and ensure that tax evasion carries severe penalties and opprobrium. It is the older and more affluent tax payer who is most likely to have access to professional assistance to reduce their tax liabilities; this makes the interrelated issues of tax complexity and tax compliance highly significant for intergenerational fairness.
Although it is an imperfect methodology, the sums involved in tax non-compliance can be estimated by looking at the difference between national income levels as declared in tax returns and the true level of expenditures within the economy as measured through the banking system. According to the HMRC, the tax gap for the 2020/21 year was £32 billion, though many commentators say the amounts involved could be much higher. In any case a loss of £32 billion in annual revenue is substantial and it seems reasonable to assume that the above stated suggestions would produce further £ billions in (net) annual tax revenue.
Raise £100 billion
Whilst the following estimation needs independent verification by the IFS, I would suggest that the proposals made in this article would increase UK annual tax revenues by at least £100 billion without the government having to increase tax rates or create new taxes.
Intergenerational fairness, however, does not only depend upon fair taxation but also upon fair distribution of tax revenues.
Currently in the UK, both the Conservative Government and the Labour Opposition see the need to achieve a balanced budget and, in the medium term, a reducing overall national debt (as a proportion of Gross Domestic Product or GDP) as a test of their competence in economic policy making; however, they have both stated that this is also an intergenerational fairness issue. The argument they put forward is a simple one: budget deficits require government borrowing; government borrowing only postpones the need for more taxation (or future cuts to public services); and that same additional future taxation (or future cuts to public services) is bound to fall more heavily upon the younger generations. It does seem reasonable therefore to conclude that at least some of the additional revenues raised through fair taxation should be used to reduce the annual level of net government borrowing – that is, to a level which reduces UK national debt as a proportion of UK GDP.
Reduce intergenerational unfairness
There are a number of other areas of government spending (both investment and revenue) that could be used to help reduce current intergenerational unfairness. One way of looking at what needs to be done is to attempt to re-establish for younger generations today some of the expectations of government support which the Baby Boomer generation could take for granted at the various stages of their lives.
The growth in the volume of rented housing provided by Housing Associations has resulted in much of today’s so-called “social housing” becoming almost indistinguishable from private renting in both the rents charged (at 80% of market rates) and in the conditions of tenancy. A policy to ensure a large and ongoing programme of council house building, however, would stabilise house price inflation and limit the amount of rent a private landlord can charge a tenant – as indeed it did in the 1950s, 1960s and 1970s for Baby Boomers and their parents. More council properties would provide an excellent alternative to private renting for many young people whilst they sought to save the deposit for a house of their own in the future. These new council houses need to be integrated into communities to avoid becoming isolated ghettos and have good access to both public and private transport infrastructure; they must also be located in areas with good job and business opportunities.
Whilst there will be many other pressures upon the NHS, many directly related to our ageing population, there is an urgent need to invest in high quality maternity, baby care and child care services. Mental health services have, for many years, been the poor relation within the NHS and this has adversely impacted younger people. This needs to be another area of greater priority. The Baby Boomer generation also benefitted from a generous system of child benefits and allowances which needs to be re-established.
Education and training
Education and Training should always be at the heart of what a government does because of its potential to change young lives for the better and to enable the UK to be both economically competitive and socially mobile. In the “post-free market” and “post-global” economy of the 21st century there is once again a duty upon all governments to ensure that their citizens have a variety of opportunities to make a living throughout their working lives. This duty can only be realistically fulfilled by life-long state support for education and skills training and by ensuring that young people start their working lives with the most relevant skills and qualifications to enable them to have high quality employment or, at the very least, the promise of future high quality employment. In addition, the triple whammy of an ageing population, a reducing birth rate and exit from the EU’s Freedom of Movement regulations means that there is now an absolute shortage of labour in the UK. A more skilled and technologically able workforce is therefore an essential component of any conceivable UK economic policy but which urgently needs additional funding. A starting point would be to revisit student tuition fees with a view to reducing and ultimately abolishing a charge that has, for many, become a de facto life-long liability. Baby Boomers did not have to pay university tuition fees and nor did they need to possess a degree to gain access to many professions and other well paid, career long, occupations!
Safety and security
If younger people do not feel safe, secure and protected from violent crime, drug crime, organised and digital crime – and from the social and economic damage caused by tax evasion, racketeering and fraud – then all other personal freedoms and social policy support are devalued or become meaningless. If a young person cannot safely travel to their place of work and go about their daily business without harassment then it’s of little value to them that they can get an appointment with their GP, or that they have a flat to live in, or that they have a job to go to. Older and more affluent people can much more easily evade crime by choosing to live in safer places, by traveling in private cars and taxis, by engaging in more salubrious forms of recreation and by building a support network around themselves of similarly advantaged people. So any shortfall in police numbers, any backlogs in the criminal justice system, any lack of prison places and any lack in resources to tackle digital crime and fraud is far more likely to disadvantage younger and less affluent people. Additional resources to relieve and support the UK’s hard pressed policing and justice system is therefore another imperative for intergenerational fairness.
It is time to call upon the UK Conservative Government and Labour Opposition to commit to achieving intergenerational fairness in their respective decisions, proposals and responses for the November 2022 Autumn Statement; and in all future UK Budgets.
Help us to be able to do more
Now that you’ve reached the end of the article, we want to thank you for being interested in IF’s work standing up for younger and future generations. We’re really proud of what we’ve achieved so far. And with your help we can do much more, so please consider helping to make IF more sustainable. You can do so by following this link: Donate
Image courtesy of: HM Treasury and The Rt Hon Jeremy Hunt MP, Photographer: Andrew Parsons