As the 6 March budget approaches, Daniel Harrison, IF supporter, economist, and author of the book Intergenerational Theft asks whether the Government will offer intergenerationally fair tax and spending promises in the last major opportunity before the forthcoming General Election.
Polling looking bad
With the Conservative Party consistently running around 20% behind in the polls, pressure is on the Chancellor to do something drastic to reverse the party’s electoral fortunes. The existential problem for the Conservative Party is that the scope for being drastic is very limited and they have largely brought it upon themselves. In that context, it would be helpful to begin by bringing in some humour with what is arguably the most profound joke that beautifully sums up the current malaise: A tourist in Ireland asks a man for directions and the local replies wisely, “If I were you, I wouldn’t start from here.” So let’s briefly start with asking why we are here? The quick answer is a toxic mixture of low economic growth and high (economic & intergenerational) inequality.
Low economic growth
Fundamentally, the United Kingdom (UK) has experienced chronically low economic growth over the past 45 years or so. Although Capitalism can be very positive, the country has experienced ideologically-driven deregulated free-market Capitalism which encourages short-term speculation and allows investors to make profits in non-productive ways via e.g. share trading, F-X trading, growing “financialisation”, housing speculation etc. The result has been to divert capital away from genuinely productive investment. And in that low growth environment, governments have masked that poor economic performance with a raft of: privatisations i.e selling off the family silver; North Sea oil windfalls; accumulating national debt; and manipulating housing market growth. They have succeeded in making the electorate “feel wealthier” when in fact it is a zero-sum game that merely makes one generation asset rich by making the next generation poorer. Regulated Capitalism that incentivises genuine investment is what the UK urgently needs.
Largest fall in living standards on record
Alas, according to the Office for Budget Responsibility (OBR), In 2022–23 and 2023–24, living standards are set for the largest fall on record. Furthermore, the UK economy is now technically in recession. This severely constrains what any Chancellor can do because government tax and spending commitments rely upon rising tax receipts rolling in. This is why both main political parties keep talking about economic growth. However, neither party appears to have a credible plan for genuine economic growth.
National debt
For any incumbent or incoming government, the economic room for manoeuvre is very limited. Due to decades of overspending and undertaxation of the electorate, the UK is now £2.6 trillion in debt, equivalent to over 100% of GDP.
And because both the Conservative and Labour party have pledged to reduce the share of national debt as a share of national income, the Institute For Fiscal Studies (IFS) recently stated that there will be “limited scope to cut taxes or increase spending by a meaningful amount.”
Furthermore, rising interest rates mean that national debt interest payments now exceed £112 billion a year. That’s around 10% of your taxes just going to service the national debt interest payments. To use an analogy, the country’s credit card is maxed out, and we are only paying the interest, let alone paying down the debt. Not only is this starving vital public services of money, but in terms of intergenerational fairness, even Prime Minister Rishi Sunak admitted at the 2021 Conservative Party Conference that “Just borrowing more money and stacking up bills for future generations to pay is not just economically irresponsible, it is immoral.”
Intergenerational inequality
Growing economic and intergenerational inequality in the UK means that wealth is increasingly hoarded by the rich, the over-60s, and locked up in housing. Why? Because due to a post-war demographic boom in the UK there are around 3 million ‘extra’ baby boomer voters, a government policy bias increasingly favours that cohort – hence why they were undertaxed and overspent on when they were working age – and why we are now £2.6 trillion in national debt. But as that baby boomer cohort ages, the government policy bias now strongly panders towards older voters – for example with the ‘Triple-lock’ on the state pension – which further entrenches intergenerational inequality.
The last major analysis called “generational accounting” by the 2015 UK Parliament Select Committee for Work and Pensions concluded that, “The economy has become skewed in favour of baby boomers and against millennials.…People currently aged 65–69 would on average have a net withdrawal of more than £220,000 over the remainder of their lifetimes. In order to achieve fiscal balance by the end of today’s infants’ lifetimes, as yet unborn people would each need to contribute an average of £160,000 in net terms.”
So in that context, what is the budget likely to announce?
Housing
A new report states that England is the worst place in the developed world to find housing. Our dysfunctional housing market locks away £8.7 trillion in unproductive capital which makes the older homeowning majority undeservingly asset rich – but at the expense of the young. It’s a zero sum game by driving an estimated wealth transfer from young to old of £3.9 trillion.
Profoundly, the housing affordability crisis is a problem the government simply does not want to solve because it serves a political purpose to make the older homeowning majority feel wealthy. Therefore, the Chancellor is only likely to tinker round the edges:
- Stamp Duty thresholds and/or tax rates are likely to be reduced
- Introduction of a government backed 99% mortgage scheme requiring only a 1% deposit
- Improvements to the Lifetime ISA (LISA)
The genius of these policies is that they ostensibly help young people onto the housing ladder whilst their real intent is actually to pander to the core voter base of the homeowning majority.
Income taxes/National Insurance contributions
The scope for tax cuts is therefore very limited. A 1 pence income tax cut would cost around £5 billion a year, so there may be scope for a 1p–2p income tax cut. However, due to many years of frozen tax thresholds, and resulting ‘fiscal drag’, the OBR confirmed that the Autumn Statement meant that taxes as a share of the economy will still rise “in every year to a post-war high of 37.7% of GDP by 2028/29.” Nonetheless, to make any tax cuts credible to the OBR and financial markets, they would need to be carefully funded, possibly only in conjunction with controversial cuts to public services and wider austerity measures.
Capital Gains Tax
As the Intergenerational Foundation and many others have campaigned for, it is intergenerationally unfair that working-age people are taxed at a higher rate for earned income, whilst older wealthier people are taxed at a lower capital gains tax for unearned income from assets and investments. However persuasive that argument is, it is highly unlikely that a Conservative government – one that represents the interests of capital – would align taxes in this way. Furthermore, the Labour Party have also ruled out this tax alignment.
Inheritance tax
Inheritance tax (IHT) only applies to less than 4% of estates. and scrapping IHT would mean that nearly half the benefits would go to the top 1%. Scrapping IHT would cost £7 billion a year and in that context it would make more political sense to use that money to reduce income tax for a broader number of floating voters. Therefore if there are any changes to IHT, the thresholds might be tweaked and/or a longer-term commitment to review it may be made in the election manifesto.
Pensions
The inherent injustice of our unfunded ‘pay as you go’ pension system is the £4.1 trillion shortfall which means that younger generations are being forced to subsidise the old through higher taxes over their lifetime. Despite many commentators stating that the Triple-Lock on the State Pension is unsustainable, the Labour Party plan to retain it in their manifesto, and the Conservative Party will be forced to match. Therefore the most likely budget announcement is:
- The State Pension age will rise more quickly than anticipated to 71
- Working-age people may be allowed to release some of their state pension early
- A range of pension tax reliefs that disproportionately benefit wealthy older people, and which the Intergenerational Foundation have campaigned to remove, may be revised
Savings
There are likely to be changes to the lifetime ISA (LISA), and an increase in the £20,000 annual limit for cash and stock/shares ISAs. Another possible announcement is a “British ISA” that is only invested in UK company shares in order to drive share ownership and investment in UK PLC.
Sacrificial lambs
So what will the upcoming budget likely mean for intergenerational fairness? Expect the budget to merely tinker around the edges. Whilst the older homeowning majority dominate the electorate, we are unlikely to see any political party address intergenerational inequality in the UK. Fundamentally, due to the anomaly of the post-war baby boom, the young (under-50s) are the sacrificial lamb in our so-called democracy. Furthermore, the forthcoming general election is likely to be even more biased towards older voters, because of the introduction of voter ID and 2.3 million ex-pats now being allowed to vote in UK elections.
There is hope for younger generations
However, we need to keep campaigning for intergenerational fairness. As the older generation pass on, the tide will gradually change as the political balance swings back towards younger voters. And the growing awareness of the issues amongst Generation X, Y, and Z will eventually exert immense pressure on government to act decisively to correct a profound intergenerational injustice. That is why we will keep calling for policies necessary to reduce intergenerational inequality:
- Implement a large housebuilding programme to increase supply and reduce house prices/rents
- Launch a thorough review of the current state pension system
- Align income tax on earned income with capital gains tax on unearned income
- Review student fees and maintenance loans
- Introduce a modest wealth tax only on the very wealthiest 1% of individuals
- Lower the voting age to 16 alongside Scotland’s implementation in 2016
- Support the Wellbeing of Future Generations Act in England and follow Scotland’s and Wales’ example
- And perhaps create a cabinet minister for intergenerational fairness?
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