Bright Blue, the independent think tank for liberal conservatism, has today published new research, entitled Tackling intergenerational inequity at its roots, calling on the Government to introduce reforms to mitigate the intergenerational inequity that is resulting from government spending.
The research, authored by Associate Fellow Michael Johnson, outlines the vast, and continuing, growth in unfunded spending promises by government, notably in respect of pensions.
The research argues that the nation’s financial health is better assessed using HM Treasury’s ‘Whole Government Accounts’ rather than the ‘National Accounts’, since it includes several unfunded promises. In the Whole Government Accounts, the nation’s net liability more than doubled in the six years to the end of March in 2017 to £2,421 billion; this figure is equivalent to 120% of GDP and £89,000 per household. But this net liability figure excludes the State Pension. Include this, and the UK’s net liability would have leapt to over £6,600 billion at the end of March 2017, some £243,000 per household.
The report proposes makes five main proposals to prevent the ongoing perpetration of intergenerational injustice in the nation’s finances at source:
- The UK should introduce ‘Intergenerational Impact Assessments’ (‘IIAs’) to accompany draft legislation as it proceeds through Parliament
Prospective legislation is accompanied by a regulatory ‘Impact Assessment’ (‘IA’), an evidence-based document designed to improve the quality of regulation by quantifying its costs and benefits. IAs do not, however, explicitly quantify the extent to which costs are being deferred, and thus the financial impact of legislation on the young, as future taxpayers.
The expressed purpose of IIAs would be to highlight prospective legislation’s cost, efficiency and fairness for future generations. These IIAs would be prepared by a new ‘Office for Fiscal Responsibility’ (‘OFR’), described below.
A key objective for IIAs would be to improve transparency, a prerequisite for any meaningful debate about how longer-term unfunded commitments are to be met and by whom.
- A new Office for Fiscal Responsibility (OFR) should pursue a tax simplification agenda alongside an examination of the effectiveness and value for money of all tax reliefs, and also coordinate the production of Intergenerational Impact Assessments (IIAs).
There are over 1,100 tax reliefs. HMRC expects tax reliefs to cost a total of over £425 billion in 2018-19, the equivalent of 52% of expected tax revenues of £810 billion for 2019-20.
Parliament has little insight as to whether tax reliefs are working as intended, what they cost and whether they represent good value for money. There needs to be greater oversight of tax reliefs. But the question remains as to whether HMRC is best placed to do this. The role would probably be more appropriately conducted from within an enhanced Office for Tax Simplification (OTS), which could be renamed the ‘Office for Fiscal Responsibility’ (‘OFR’).
To be clear, decisions on tax policy and legislation should remain a matter for the Chancellor. The new OFR would be to provide the Chancellor with supporting material (including IIAs) and recommendations. An ORF should exude an ethos of fiduciary duty towards current and future taxpayers, and aspire to a reputation for independence akin to that of the Office for Budget Responsibility (OBR).
- After five years, each and every tax relief would automatically cease
A revolving programme of tax relief reviews by the OFR could be set in train by attaching a five-year sunset clause to all tax reliefs, distributed throughout a parliamentary term to even out the OFR’s workload. It would then be for politicians and policymakers to periodically remake the case for them. For some of the structural reliefs, this should be a purely perfunctory exercise.
- Departmental budgets should be set both gross and net of expenditure on tax reliefs and exemptions, to ensure transparency as to the true level of financial support to each area of public policy
Taxpayers deserve regular, thorough and systematic scrutiny of the effectiveness and value for money of all tax reliefs.
Departmental annual budgets are set without taking into account the cost of relevant tax reliefs. This disconnection is extraordinary, and surely leads to resource misallocation, as well as rendering meaningless any value for money exercises.
- The UK’s Whole of Government Accounts (WGA) balance sheet should include a liability to represent future State Pension payments, based upon a realistic expectation of the future cash outflow, discounted using gilt yields.
Bizarrely, the State Pension, the largest of all unfunded liabilities (roughly £4,200 billion at the end of March 2017), is excluded from the WGA. The State Pension is excluded from the WGA because it is deemed to be a benefit (‘welfare’) rather than an obligation. The State Pension liability escapes the WGA, seemingly on a technicality. But, that aside, it still has to be met, through taxation. Consequently, in the interests of transparency, it should be included in the WGA.
Commenting Michael Johnson, Associate Fellow of Bright Blue and author of the analysis, says:
“If the UK were accounted for as a public company, it would be bankrupt. There is no evidence to suggest that the torrent of unfunded promises and provisions being made by Parliament will abate anytime soon. The perpetration of intergenerational injustice continues unabated.”
“We need to put a brake on deferring costs that millennials in particular will otherwise have to meet. We need to tackle this ongoing perpetration of intergenerational injustice at source, through policies operating right at the heart of the legislative process that will arrest Parliament’s output of unfunded spending commitments and provisions.”
Commenting Ryan Shorthouse, Director of Bright Blue, says:
“The Conservative Government should not be complacent about the ongoing need to reduce the budget deficit. Balancing the books is not simply neat accounting. It is of fundamental economic and moral importance.”
“If we do not eliminate the budget deficit in the near-term, it is younger generations who will have to pay more – through tax rises or spending cuts – in the future. Forgetting deficit reduction will only exacerbate the growing intergenerational inequity that is emerging in modern Britain.”
“It is common to hear politicians and policymakers complain about intergenerational inequality. But warm words are not enough. A set of bold and original policies are necessary.”
Commenting The Rt Hon Nicky Morgan MP, Chair of the Treasury Select Committee, says:
“Growing intergenerational inequality in Britain is now well-documented and widely discussed. It is time that politicians address it, not least by exerting tighter control on public spending. This will reduce the risk that future generations will face excessive tax rises or cuts to public services.”
“Intergenerational Impact Assessments to accompany prospective legislation as it passes through Parliament will add a new dimension to scrutiny and debate. Politicians should be open to having as much clarity as possible about the consequences of their spending decisions for future taxpayers.”
