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A Budget for intergenerational fairness?

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Summary

Beyond facing down expected economic downgrades and clarifying the direction on Brexit, resetting the agenda on intergenerational fairness has emerged as a top priority for the Chancellor in this month’s Budget. This focus reflects a growing body of evidence showing that generation-on-generation living standards progress is under threat for today’s young adults – as analysis for the Resolution Foundation’s Intergenerational Commission has demonstrated over the past year.

Restarting this progress will require far-reaching and long-term solutions in a range of areas including housing, labour market security, reforms across the tax system and the funding of social care. This briefing note does not seek to cover all of this ground. Rather, we focus on the levers that Chancellors most frequently turn to at Budget time – the taxation of income, and working-age benefits.

Our objective is not to offer recommendations nor an internally-funded package. Instead, we demonstrate the intergenerational parameters by which policies should more frequently be judged, by assessing the impact both across and within generations of options that have been offered to the Chancellor or are readily available to him.

In terms of ways in which the government could support incomes:

  • Some within his party have called on the Chancellor to offer income tax or National Insurance cuts to the young. Our analysis shows that while well-focused from an intergenerational perspective, such an approach is expensive, highly regressive and adds complexity to the tax code. For example, a reduction in the basic rate of income tax to 15 per cent for adults under 30 would cost £3.2 billion in 2021-22, with more than half of this money flowing to the richest fifth of 20-somethings.
  • Un-freezing working-age benefits would provide a better-targeted boost to young families’ living standards. Uprating benefits in line with inflation in April 2018 would cost around £2 billion in 2021-22, with more than half (56 per cent) of this money spent on millennials, predominantly benefitting low-income members of this generation.
  • Boosting welfare spending in other ways – for example by increasing Universal Credit work allowances for families with children or reducing the taper rate – would ease the burden for young low-income families further, and retain the focus on less well-off millennials.

In terms of ways in which the government could fund policy priorities:

  • Rather than add new age-related inequalities into the tax system, the Chancellor could instead tackle existing ones by making workers of all ages pay the same National Insurance contributions (NICs). Removing the exemption from employee and self-employed NICs for workers at or above the State Pension age would raise around £1 billion in 2021-22, with more than four-fifths of this revenue drawn from the highest-income 20 per cent of pensioners.
  • Freezing the level at which people start paying income tax once it has reached the manifesto target of £12,500 would raise £700 million in 2021-22, with the impact strongly focused on the highest-income adults within both the millennial and baby boomer generations.

Resetting the agenda on intergenerational fairness will require a broader approach than tax and benefit changes of this nature. In particular, government action to boost housing supply will be essential, as the debate in the run up to this month’s Budget has rightly highlighted. In the coming months the Intergenerational Commission will outline options for a fairer deal across the generations in these and a range of other areas.