In this article, IF researcher Conor Nakkan argues that the upcoming Budget is an opportunity to put the public finances on a more sustainable footing while also prioritising the needs of younger generations.
A difficult backdrop
On November 26, Chancellor Rachel Reeves will deliver her second Budget. Unfortunately for the Chancellor, she will do so against a difficult economic and fiscal backdrop. Economic growth remains sluggish, inflation has proved more persistent than expected, the labour market has softened, and borrowing costs remain elevated.
The updated forecasts from the Office for Budget Responsibility (OBR) are unlikely to make her job any easier. Early reports suggest that the OBR is expected to downgrade its productivity growth forecast by around 0.3 percentage points. That might not sound like much, but it has a huge impact on the public finances. The Institute for Fiscal Studies (IFS) has suggested that each 0.1 percentage point downgrade adds around £7 billion to borrowing by 2029–30.
These circumstances will make it difficult for the Chancellor to meet her self-imposed fiscal rules. At this stage, she could be facing a fiscal “black hole” of around £30 billion. This has led many economists to argue that Reeves may be forced either to break her manifesto tax commitments or to pursue spending cuts.
Priorities
Government budgets are, as Gordon Brown once put it, “about priorities.” All governments must decide how to raise revenue and what to spend it on. And those decisions often reveal whose interests they choose to prioritise.
In the UK, successive governments have tended to prioritise the interests of older generations. This is clearly reflected in how the distribution of government spending has changed over time. Research by IF has demonstrated that the gap between total per-person spending on pensioners and children has widened by 170% over the past 20 years.
Tough choices
When economic conditions are not so rosy, governments often retreat to another familiar phrase: that budgets are about making “tough choices.” And, of course, that is true. Governments, like households, face trade-offs and cannot satisfy their unlimited wants with limited means. But what is striking is how often the consequences of those “tough choices” seem to disproportionately fall on the shoulders of young people.
Compare, for example, the experience of younger and older people during the period of austerity. Older people benefited significantly from the introduction of the triple lock on the State Pension in 2011. This policy ensures that the weekly rate of the State Pension increases each year by the highest of average earnings growth, inflation, or 2.5 per cent. The latest estimates from the OBR suggest that the triple lock will cost £15.5 billion a year by 2029–30. This is nearly three times higher than the £5.2 billion originally forecast at the time of its implementation.
At the same time, funding for youth services was slashed. Between 2010 and 2020, local authority spending on youth services was cut by more than 70% in real-terms. By 2023, around 1,200 youth centres had closed and over 4,500 youth workers lost their jobs. Research has shown that these cuts have contributed to falling educational performance and increasing rates of youth offending.
Where should the money go?
While the upcoming Budget will involve some genuinely tough choices, there are several targeted measures that could go a long way to addressing some of the most pressing challenges facing younger people. Importantly, these measures are modest in their overall cost and could be easily offset by reforms elsewhere.
1. Local council youth services
The starting point should be to restore, in real terms, funding for local authority youth services to pre-austerity levels by the end of this Parliament. Reasonable estimates suggest this would require around an additional £1.5 billion per year by 2029-30. This uplift is unlikely to entirely reverse the damage caused by a decade of cuts under austerity. Nonetheless, it would begin to rebuild some of the services that many young people rely on.
2. Children and young people’s mental-health services
Alongside this, the government should also increase investment in children and young people’s mental-health services. Across the UK, younger people are experiencing a mental health crisis. But, according to the Children’s Commissioner, NHS Integrated Care Boards in England only spent around £1.1 billion on these services in 2023-24. This is equivalent to just 1% of their total budgets. At a minimum, this level of funding should be doubled in real terms by the end of this parliament. Greater investment would help to reduce waiting times and expand early-intervention and community-based provision. But it could address one of the key drivers of rising economic inactivity among young people: poor mental health.
3. Abolish the two-child limit
Finally, the two-child limit should be abolished. In 2024, roughly one-third of all children in the UK are projected to be living in poverty. Research by the Joseph Rowntree Foundation suggests that removing the two-child limit, alongside introducing a protected minimum floor in universal credit, could lift around 500,000 children out of poverty. It would also significantly reduce hardship for a further one million families. These changes would cost around £2.6 billion in 2025-26, rising to £3.6 billion in 2029-30.
These proposed measures represent a tiny fraction of total government spending, which was around £1,189 billion in 2023-24. But they could deliver substantial benefits for younger and lower-income households. Most importantly, they would signal that the government is finally prepared to prioritise the needs younger generations.
Where should the money come from?
So, you might reasonably wonder: how could we afford these measures while also rebuilding the government’s fiscal buffers? Well, here are three reforms that the Chancellor ought to seriously consider, especially if she wants “those with the broadest shoulders to pay the most.”
1. Remove unfair National Insurance exemptions
First, the government should remove the National Insurance exemptions for investment income and people above State Pension Age. At present, income from dividends, rent, and savings is exempt from National Insurance. And those above State Pension Age do not pay National Insurance on their earnings, even if they continue working. These exemptions are increasingly hard to justify given the ageing population and broader fiscal context. In 2021, researchers at the LSE and the University of Warwick estimated that these reforms could generate £12 billion per year.
2. Replace the triple lock on the State Pension
Second, the government should temporarily replace the triple lock on the State Pension with inflation-based uprating for the next five years. Forthcoming research by IF suggests this could save around £8 billion per year by the early 2030s. Once public debt is on a sustainable downward path, an earnings link could be established to ensure the State Pension continues to rise in line with living standards in the longer-term.
3. Reform the Capital Gains Tax system
Third, the Chancellor should reform the capital gains tax system. Researchers at the Centre for the Analysis of Taxation have proposed a package of CGT reforms. These include aligning CGT rates more closely with income tax, introducing an allowance for normal investment returns, and taxing gains at death. Together, these reforms could raise around £14 billion a year. But they could also simplify the CGT system and ensure the wealthiest contribute a fairer share.
Putting it all together
While some of these proposals may be politically difficult to implement, they are hardly radical. Rather, they acknowledge that tough choices will have to be made in the upcoming Budget. But instead of making young people bear the brunt of those choices, they show how the government can repair the public finances while prioritising the needs of younger generations (for once).
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Photo by House of Commons on flicker.