This was always going to be a difficult Budget. Economic growth remains sluggish, the labour market has softened, and borrowing costs remain elevated. The OBR’s downgraded productivity growth forecasts also did not make the Chancellor’s job any easier.
But government Budgets are ultimately 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 generally prioritised older generations. Over the last 20 years, for example, the gap between total per-person spending on pensioners and children has widened by 170 per cent in real terms.
As IF’s research has shown, younger generations are being asked to carry an increasingly unfair burden. Despite becoming more educated, young people today face higher levels of unemployment, greater job insecurity, and relatively stagnant wages. They are less likely to own a home and more likely to spend the majority of their incomes on essentials. At the same time, they are saddled with rising student debt and face high marginal tax rates. This situation is neither fair nor sustainable.
Against this backdrop, it was good to see the government announce several policies that benefit young people. The freeze on regulated rail fares should help to reduce transport costs, while the long-overdue removal of the two-child benefit limit will lift hundreds of thousands of children out of poverty. Increases to the minimum wage, particularly for younger workers, will support those on lower incomes, although some of these gains may be offset by reduced employment. The additional funding for apprenticeships and the Youth Guarantee has the potential to expand alternative routes into work and address rising youth economic inactivity.
Some of the tax measures announced also raise additional revenue in ways that are intergenerationally fair. IF welcomes the increases to taxes on sources of unearned income such as dividends, savings, and property. Likewise, the council tax surcharge on properties worth more than £2 million will also increase tax liabilities for owners of the most expensive homes, whose values have grown dramatically over recent decades.
Yet, despite these positive changes, several measures increase the already substantial pressures facing younger workers, while doing little to address the deeper drivers of intergenerational inequality.
Most notably, the single largest tax measure, a three-year extension to the freeze in personal tax thresholds, is a stealth tax that drags ever more low- and middle-income workers into higher tax bands. Younger workers, already facing weak pay growth and high living costs, will feel the squeeze most acutely. The punitive decision to freeze the repayment threshold for Plan 2 student loans will also reduce graduates’ disposable incomes at a time when living costs remain high.
Perhaps most disappointing of all, this Budget failed to address the fiscal elephant in the room: the State Pension. The Government once again reaffirmed its commitment to the triple lock, with the State Pension set to rise by 4.8 per cent in April next year. Given substantial fiscal and demographic pressures and the significant decline in pensioner poverty, this was a missed opportunity to place the system on a more sustainable footing.
A better approach would have been to temporarily replace the triple lock with inflation-based uprating for the next five years. Forthcoming IF research suggests this could save around £8 billion per year by the early 2030s. Once debt is on a sustainable downward path, an earnings link could then be restored to ensure the State Pension continues to rise in line with living standards over the longer term.
Senior Researcher, Conor Nakkan, explains that: “This Budget does a few things well. It increases taxes on unearned income and high-value properties, and it restores some much-needed fiscal headroom. The efforts to expand apprenticeships and create alternative pathways into work for younger people are also welcome. But the resources of the state remain overwhelmingly skewed towards older generations. Younger workers will see their tax bills rise over the coming years, while pensioners, including the three million who live in millionaire households, continue to benefit from an increasingly unaffordable triple lock.”
“The increase to the National Living Wage, freezes to rail fares, upping Universal Credit, and the removal of the two-child benefit cap will help young people and young families with their cost of living. However, for the majority of young people, this will be more than offset by a far greater tax burden and increasingly punitive terms on graduate student loan repayments,” according to Toby Whelton, Senior Researcher.
For further Budget commentary, please email [email protected]. We will also be producing further bespoke analysis on several topics over the coming week.