Intergenerational Fairness in Government Policy

Lord Turnbull Excerpts

Thursday 26th October 2017 Lords Chamber

[Lord Turnbull (CB)]

My Lords, I very much welcome this debate, which brings intergenerational fairness—a subject previously confined to the higher realms of philosophy and welfare economics—to the forefront of current government policies. It seems that a new division in society is not class, around which the two main parties have been organised for nearly a century, but around age. We may deplore that fact, but I do not think that we can ignore it.

It may seem difficult to believe that younger generations will not be better off than their predecessors when they will enjoy the enormous benefits of science and technology—the genome, the internet and mobile phones. But getting an Uber in three minutes may be scant consolation when you cannot find a home that you can afford to buy or rent. There are many benefits that the young will almost certainly not see: such as free university education, although it was only available to a small fraction of the cohort; defined benefit pension schemes; retirement at 60 or 65; a foot on the housing ladder by their mid-20s and mortgage paid off by 55; and wages more or less guaranteed to rise faster than prices. So it is right to examine the current state of policies through the lens of intergenerational fairness.

Much of the Government’s rhetoric has been spent on government borrowing and debt, but is that really the main problem? Fifteen years ago, the debt to GDP ratio was about 40%. Now it is close to 80%, although it is beginning to decline, and that has been described by successive Chancellors as impoverishing future generations. In my view, this argument is exaggerated. The debt to GDP ratio is a poor metric for fairness. It ignores the decline in the cost of servicing debt. While the ratio has doubled, debt servicing, which was 2.4% 20 years ago, is still 2.4%. Secondly and more importantly, the ratio ignores the asset side of the balance sheet. If government borrowing is reflected in productive investment—for example, housing—the net wealth of the nation may well be increased.

So I put higher up my list of issues a decade of quantitative easing. Its effect is to lower interest rates and boost asset prices, the benefit of which goes mostly to those who own assets, be it land, commercial property, houses or shares, and these are overwhelmingly older people. The other beneficiaries are company executives, who are paid—unlike most of us—partly in cash and partly in shares.

We also need to be precise about terms. Inequality of incomes has not widened in the past 25 years—post tax and benefits, it has stayed virtually the same. It is the widening inequality in wealth that I think is a greater worry, and it is that to which we should address remedies.

Next on my list is pensions. There are virtually no new entrants to DB schemes, some of which are being converted to direct contribution schemes, which then struggle to earn decent returns. Nevertheless, there is still a large number of DB liabilities to be met, and the lower returns are causing huge deficits in company pension schemes, which they have to plug by reducing investment, raising prices or increasing contributions, all to the detriment of younger generations. Meanwhile, free prescriptions are still available from age 60, and the triple lock on pensions has entrenched the position of the elderly.

I do not need to say much about housing, important as it is. We have had two good debates in this House, one only last week, so I have just two comments. The Government’s White Paper confessed that, for those on the housing ladder, the average house “earned” in capital appreciation more than the average earnings of those living in it. While earnings are heavily taxed, those capital gains are not, and inheritance tax is being eased. We need action on all fronts and for all tenures, with less emphasis placed on Help to Buy and more on building affordable homes for rent, which is the epicentre of the housing crisis.

The funding of higher education also raises issues of who should pay. The system that we now have has some important principles at its heart: those who earn more as a result of acquiring a degree should make a contribution and not rely on the taxes of people many of whom will be poorer than they are; contributions should be assessed on future earnings and not on what parents were earning at the time; the funding framework should enable the Government to draw back from detailed control of numbers and courses; and, importantly, students from poorer backgrounds should have better access to higher education. What we have at the moment is a mess. It is misrepresented as a loans scheme, which makes it look more frightening than it really is. The interest rate is indefensible—it is funny how HMG always choose which of RPI or CPI suits them best for any particular circumstance. The scheme has become almost incomprehensible after many changes, and the freezing of the income threshold with retrospective effect was a disgrace. In short, a scheme that has some sound and justifiable principles behind it has been undermined by Treasury greed and opportunism in exploiting the way in which the Government’s accounts are put together. There needs to be a review, but I hope that it will correct the injustices but not be panicked into throwing out what is sound.

Then there is the issue of long-term care. We were edging towards a sensible definition of care and a fair balance between what is paid by the family and what is paid by taxpayers generally. We were also looking at what level of assets should be protected and what assets should be taken into account. In my view, it is right that the family house should be included in wealth, particularly when there is a scheme to provide deferral of payment. The Conservative Party manifesto blew this consensus wide open by knocking out a crucial element; that is, the protection given to the small number of families who incur massive bills for care. This is an issue not of intergenerational fairness but of intragenerational fairness, but it nevertheless needs to be addressed. We need to go back to the drawing board and to take the courage to get past the taunts of “dementia tax”.

Finally, there is an issue right here in this House. Many people would welcome the opportunity to serve here, so my final question is: is it fair that, once appointed, some people can serve 20 years, 30 years or 40 years, thereby reducing the opportunity to generations behind them?