According to multiple reports in the last few weeks, Phillip Hammond has abandoned his plans for a ‘safety first’ budget in order to lure voters back to the Tories. One would hope this means he will implement measures to significantly boost the supply of affordable housing and raise productivity. It would be a mistake to make unfunded commitments on current expenditure. Labour lite is not a genuine alternative to Corbynism.
The Chancellor is supposedly considering cutting tax rates for the young and slashing pension tax relief for the old to tackle intergenerational unfairness. This idea is incredibly problematic. There is a case for focusing tax cuts on the young. Many have large student debt and are finding it harder to get onto the housing ladder. We have different tax rates for different age groups already. Pensioners don’t pay national insurance contributions, for example. However, cutting tax relief would make private pensions completely irrational.
Workers currently pay into a pension tax-free and then get taxed when they come to take it out in retirement. Reducing the initial relief would lead to double taxation and discourage saving. There is a way to reform this system, however, using the Lifetime ISA introduced earlier this year. Workers under forty pay in from their post-tax income, get a bonus on the first £4,000 of contributions and take it out tax-free in retirement. They can also access the cash early to put down a deposit on their first home.
Those born after 6th April 1978 should become ineligible for pension tax relief and move over to this system. Of course the rules would have to change to offer the same benefits as pensions. Employers should be able to make contributions, the bonus ought to be extended to age 60, and it would need to be protected from benefits means-testing and bankruptcy cases. However, by moving from taxing pensions in retirement to taxing contributions as they are made, the government would be able to reduce income tax for under 40s to two rates of 15% and 35%*.
Cutting income tax for workers in their 20s and 30s would put more money in their pockets to save up for a house or retirement. In fact, those earning under £40,000 would gain more from this policy than writing off student debt. It would also allow the government to raise the state pension age for the youngest workers from 70 to 75. As a result, the state pension would become more sustainable and less of a burden on the next generation.
One of the biggest problems facing the public finances in the coming decades will be our ageing population. For each person over the age of 65 today, there are currently four people working and paying taxes. By the time I come to retire in the 2060s, there will only be two workers for every pensioner. These changing demographics mean the triple lock, and our health and social care system, are unsustainable in the long-term.
To address this problem, the Chancellor should offer a new deal to young workers at the budget: lower tax rates now in exchange for less from the state in the future. While Corbyn offers free stuff to everyone, Conservatives need to let workers keep more of the money they earn. If Philip Hammond implements these reforms, he will go down as the most radical Chancellor since Nigel Lawson in 1988.
*To reflect the lower tax rates, the Lifetime ISA bonus ought to change from 25% on the first £4,000 to 20% on the first £5,000.