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13 November 2017

Cutting taxes for the under-30s? There’s a better way to help the millennials who need it

Philip Hammond is expected to address intergenerational unfairness in the Budget. 

By laura Gardiner

With the dust beginning to settle on a scandal-focused fortnight in Westminster politics, attention is turning back to the big event looming on the horizon – Philip Hammond’s first Autumn Budget in 10 days’ time.

The backdrop looks challenging, with the Chancellor having to deal with the headache of a likely downgrade to the economic forecasts and continued uncertainty over a Brexit deal.

But rather than use this to justify a “steady as she goes” affair, we’re told it will be a “bold” and “revolutionary” Budget. So what’s he going to do?

It seems that the “revolutionary” part could be an attempt to put intergenerational fairness front and centre. Noises suggest that a big offer on house-building will be at the heart of this. And rightly so – the rising share of income taken up by housing costs is a major drain on young adults’ living standards in comparison to their predecessors at the same age. Bold housing offers don’t come cheap though, and may require a brave tweak to Hammond’s fiscal rules.

Beyond a welcome housing focus, the Chancellor will likely deploy the classic tools of Budget-building – tax and benefit changes. The problem is that while we are very good at assessing tax and welfare choices from the perspectives of rich and poor, we are not at all accustomed to viewing them through a generational lens. That’s been a key task of our ongoing Intergenerational Commission.

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Doing so is not as simple as splitting the spoils between young and old either. We should also pay attention to the distribution of outcomes within different generations, on the basis that intra-cohort inequality shows signs of rising. The last thing we want to see is the Chancellor hitting poor pensioners or lavishing tax breaks on rich youngsters in the name of intergenerational fairness. New Resolution Foundation analysis demonstrates how he can avoid this pitfall.

Take the suggestion put to him by one of his MPs to lower the basic rate of income tax for adults under 30 to 15 per cent. While this is clearly very well-targeted from an age perspective, the gains are heavily concentrated at the top. More than half of the hefty £3.2bn price tag (in 2021-22) would go to the richest fifth of 20-somethings. This move would also add complexity to an already-complex tax code.

While not overtly age-focused, a better-targeted option – reportedly gaining traction among Conservative backbenchers – would be to go via the benefit system. For example, unfreezing working age benefits in April next year would cost around £2bn, with more than half of this money spent on millennials, predominantly low-income members of this generation.

Boosting welfare spending in other ways – for example by reversing cuts to Universal Credit or reducing the speed at which it is tapered away – would sweeten the deal for this group still further.

It’s not all about boosting incomes, though. The Chancellor is likely to have to find some cash to support these or other spending objectives, and the same generational lens should be taken on his revenue-raising choices.

One approach that ticks both the inter- and intra-generational boxes would be to tackle existing age-related inequalities in the tax system, 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 £1bn a year by 2021-22. And it’s extremely progressive within this group – more than four-fifths of the revenue would come from the highest-income 20 per cent of pensioners.

Delivering a renewed intergenerational contract is about far more than the short-to-medium term tax and benefit trade-offs Chancellors typically juggle at Budget time. But having set his sights firmly on fairness between the generations, it’s right that we judge Hammond by this standard when he stands up at the despatch box.

Laura Gardiner is senior policy and research analyst at the Resolution Foundation