5 March 2018

New taxes are no way to reduce generational inequality


Lord Willetts today gave a speech at the Resolution Foundation calling for wealth taxes to be imposed on the baby boomer generation in order to fund their health and social care in old age and to prevent the burden being placed on younger generations. Moreover, he has also called for a radical rethink of the council tax system.

Much of what Willetts has said is correct. Council tax rates have not been amended since they were first introduced. As such, the entire system is ripe for reform, and so it would be sensible to see whether the government can find any extra revenue this way without placing an extra burden on those on modest incomes and without complicating the tax system further.

He is also correct to point out that the health and social care system will be unsustainable in the years and decades to come. People are living longer than ever before, which means that over the coming decades there will be a record number of people over the state pension age. This will lead to huge demographic change, placing more of a burden on those in work.

Willetts rightly highlights the inherent unfairness of this. It cannot be right that younger generations which experienced stagnating wages and living standards as a result of the global financial crisis and the Great Recession should be encumbered with such a burden. Moreover, those that will be the beneficiaries will be the generation who avoided the horrors of the Second World War and enjoyed free education, a dramatic increase in living standards, and the opportunity to own their own home.

Obviously, something has to be done to redress the balance. If not, then younger generations will face ever increasing pressures, and will be ever more tempted by the reckless spending promises of Jeremy Corbyn and John McDonnell. As such, Willetts is right when he says that an increase in income tax to fund health and social care is unthinkable.

However, the suggestion by Willetts to impose a wealth tax on baby boomers is misguided. The tax system in the UK is already incredibly complex and riddled with loopholes. Any additional tax would only exacerbate the problem.

What is needed are reforms to fix the cost of living crisis which hits those in work the hardest, tax reform to allow for economic growth, a rethink of how health and social care are funded, and a drastic shake up of the NHS.

There is a real cost of living crisis in the UK, and this hits those in work the hardest. Due to government regulations things such as food, childcare, alcohol, and transport are more expensive. Moreover, and most importantly, government regulations such as planning regulations and stamp duty make housing unaffordable and rob young people of the dream of home ownership.

If the government wants to redress intergenerational unfairness then it should start with the cost of living. In particular it should focus on fixing the housing crisis through supply side reforms such as liberalising the planning system and building sensibly on the green belt.

Willetts is right in drawing attention to the financial burden resulting from an ageing population. It is crucial that the government sorts out public finances now. Progress has been made on eliminating the deficit, but more still needs to be done. Public debt as a proportion of GDP is set to be over 200 per cent by 2066 and this will hamper future generations’ ability to fund health and social care. The government should slash wasteful public spending. Moreover, it should cut corporation tax and the top rate of income tax, which will boost growth and have the added benefit of increasing revenue for HM Treasury to spend on funding health and social care.

The government should also implement an insurance style system for elderly care. In the same way that people make contributions to their pensions while of working age, people should make a contribution to their own old-age care. This would avoid placing pressure on people who, when they reach old age, would be forced (or find their families forced) to make difficult decisions about care. It would also reduce the burden on public finances. Although such a system would place extra pressure on household budgets, this should be alleviated by the government tackling the cost of living crisis and reforming the tax system – allowing working people to keep more of their money.

Radical reforms need to be implemented in the NHS and in social care. In efficiency rankings, for example, the NHS comes out in the bottom third. In terms of the rate of avoidable deaths, it is consistently outperformed by other systems. For cancer survival, the NHS does not compare favourably with healthcare systems in other countries. Moreover, the majority of healthcare systems around the world are classed as more innovation-friendly than the NHS. In overall quality, the NHS lags behind the healthcare systems in other countries.

The results are similar when one considers the social care systems in the UK and other developed economies. It is estimated that there are now approximately 1.2 million elderly people who do not receive the help they need with essential daily living activities, an increase of 48 per cent since 2010. Moreover, almost one in eight elderly people in the UK now live with some level of unmet care need.

There are real issues relating to productivity, efficiency, and quality of care in the health and social care services in the UK which means that taxpayers are not getting good value for money. If innovative solutions are not found, and if productivity does not increase considerably, then the issue will only get worse. Failure to act now will result in a burden being placed on future generations who will be forced to pay more money to prop up a failing system.

There is a social care crisis in the UK. Lord Willetts is right to highlight the inherent unfairness of how this will place a burden on younger generations. However, he is wrong to call for new taxes. Instead the government needs to tackle the cost of living crisis by making life easier for working people now. Moreover, it needs to ensure that the public finances are in good order in the future by cutting taxes and slashing government spending. Bold reforms such as an insurance style system should be implemented and there need to be urgent reforms in efficiency, productivity, and cost effectiveness in the NHS.

Ben Ramanauskas is policy analyst at the Taxpayers' Alliance.