Alex Wild is Research Director at the TaxPayers’ Alliance.
The Conservatives’ hammering at the ballot box at the hands of the under forties has prompted a rethink on intergenerational unfairness among the upper echelons of the party.
Many involved in public policy but outside party politics have been jumping up and down for years about the issue but, depressingly, it has taken the haunting spectre of a barely-concealed Marxist alternative government to prompt action.
There are many facets to intergenerational unfairness in Britain, and it cannot be put to bed in one Budget. The challenges posed by an ageing population in a country in which serious cross-party debate about changing the “pay-as-you-go“ nature of social care, the NHS, state pensions and much more is all but impossible makes the challenge all the more daunting for any politician wanting to be re-elected.
Housing is surely the single biggest aspect and, if the Conservatives cannot overcome their fear of upsetting older voters in the shires, they face electoral oblivion in the not-too-distant future. It is crucial that the likes of Sajid Javid prevail over anti-housebuilding MPs worried about losing a slither of their often massive majorities. Opposition to development may remain strong among the well-housed baby boomers who are well represented among party activists, but the popular opinion is shifting. Just 24 per cent said they opposed new homes in their own areas in 2016, down from 46 per cent in 2010.
Likewise, senior figures in the party should stop regurgitating debunked leftist theories that the housing crisis is down to greedy developers ‘landbanking’ or ultra-rich foreigners leaving Mayfair mansions empty, and face up to the facts: the problem is our highly-restrictive planning system. There is recent encouraging news on this front, specifically that Sajid Javid, Gavin Barwell and MPs in marginal seats are pushing for major reform.
Other reports suggests that ministers are thinking about linking tax rates to age. This is far from optimal, but in the absence of wholesale tax reform it could present a workable step forward. Depressingly however, the Chancellor is rumoured to be considering further cuts to tax relief on pension contributions to “pay for” any such change: the annual and lifetime allowances have already been cut by 84 per cent and 44 per cent respectively since 2010.
Instead, the Government should reconsider plans to increase the student loan repayment threshold from £21,000 to £25,000 for those who started university after 2012. This last policy would significantly increase the cost to taxpayers, and mean that 83 per cent of graduates would not fully repay their loans (up from 77 per cent at present), further weakening incentives for students to apply downwards pressure on costs.
The youth vote is not one homogenous lump: more than half of school leavers won’t go to university, and won’t benefit from more generous student loan terms. A distinctly fairer and more “conservative” approach would be to increase the starting age on employees’ national insurance contributions.
The Government’s new tuition fees policy will increase the cost of loans by £2.3 billion a year and benefit middle and higher income graduates the most. Exempting everyone under 26 from employee’s national insurance would reduce revenues by £2.6 billion, before taking into account the dynamic gains from stronger work incentives. By the time the average (median) earner reached their 26th birthday, they’d be £5,500 better off.
Better still, the Government could cut the repayment threshold to £12,500, increase the repayment rate from nine per cent to 15 per cent, and abolish employees’ national insurance contributions for everyone under 30. Doing so would cut spending by £4.4 billion and cut tax by £7.2 billion. By the time of their thirtieth birthday, the median earner would have repaid £9,589 of their student loan (as opposed to £742 under the current system), but paid £12,564 less national insurance. Graduates would continue to benefit from lower interest charges as a result of lower outstanding balances after long after their thirtieth birthdays.
Conservatives should favour this approach for another reason: it would significantly strengthen market forces in higher education. The current system works like a loan for the 23 per cent who repay it in full, but a graduate tax for the remainder. The greater the number of students for whom the system acts as a loan, the greater the incentive for universities to compete on price.
These proposals would also provide a meaningful step towards a full merger of income tax and national insurance in future and are certainly superior alternatives to current Labour-lite proposals that benefit higher-earning graduates.
Beyond higher education, the same approach should be applied to other areas where sensible, pro-market policy is losing ground to heavy-handed government intervention. Instead of lifting a pay cap for the 17 per cent of the workforce in the public sector, who already enjoy higher pay and far more generous pensions than their private sector counterparts, why not cut tax for the benefit of those in the public and private sectors?
Every percentage point increase in public sector pay costs around £1.8 billion, roughly the same amount that revenues would fall by were the government to increase the point at which employees start paying national insurance from £8,164 to £8,892 a year. The numbers don’t fully account for the fact that some of any public sector pay increase would be recouped through higher tax receipts, but they do indicate the sort of options that the overnment has if it wants to offer something better.
Higher student loan subsidies for the few or tax cuts for the many, Chancellor?