ON July 4, the electorate handed Labour an immense mandate for change, both in Scotland and across the UK. By pledging to improve public services and grow the economy without raising income tax, national insurance contributions or VAT, the new Government has set itself a difficult - though not impossible - challenge. To stand a chance of success it must support working age households and resolve the vast intergenerational inequalities that mounted up under earlier administrations.

The pension triple lock, by which pensions rise by whichever’s highest out of inflation, earnings and 2.5%, is often credited with combating pensioner poverty (though empirically, the vast majority of reduction in pensioner poverty occurred prior to its introduction in 2010). While reducing poverty is a laudable goal, currently disposable income among pensioner households exceeds that of working households across the income distribution. As a result, the triple lock, which continues to redistribute income from working households to pensioners, actually increases poverty overall.

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According to a recent government report, the proportion of UK pensioners living in absolute poverty after housing costs are accounted for stood at 12% in 2022/2023. Using the same measure, 25% of children and 17% of working age adults lived in poverty at that time. The effect of inflation in 2023/2024, from which pensioners but not children were protected, is likely to have widened the already appalling gap with child poverty even further.

Allowing a quarter of our children to be raised in poverty is as much a failure of UK economic strategy as it is a moral one. Economists have long known that the experience of material deprivation in childhood can lower productivity and earnings throughout one’s working life. In fact, a wealth of evidence demonstrates that well-designed investments in poor children’s nutrition, education and care, lead to improved earnings so that these policies more than pay for themselves through higher tax revenues, reduced benefit dependence, and lower rates of criminality and incarceration over the lifetimes of beneficiaries. The last point is especially salient given the current prison crisis.

The high rates of recovery on public investments in education extend through the school years and into university. Recent analysis shows that people who opt to go to university on average earn 37% more at age 31 than individuals who had the qualifications to go to university but opted to stay in work instead. Higher graduate productivity not only contributes to economic growth throughout the working lives of graduates, but also improves the public finances through increased tax revenues from the additional income.

Estimates from the Institute for Fiscal Studies found the exchequer gains the equivalent of £110,000 from the average male enrolled on an undergraduate degree and £30,000 from the average female over their working lives, with the difference driven by average lifetime earnings among women being lower, leading to lower rates of maintenance loan repayment and lower average tax payments. Increasing funding and support to incentivise young people to go to university is thus likely to boost the UK’s growth prospects and generate surpluses for our public finances.

A disproportionately generous state pension not only restricts growth by diverting funds away from growth-boosting investments in children and young people, it also necessitates higher taxes on businesses and employees which reduce incentives to work. Industry research estimates that in the last decade the net housing wealth held by the over-65s increased by £1.11 trillion. This largely unearned windfall comes at the expense of younger generations who have found it increasingly difficult to afford a home with house price inflation outpacing wage growth. One way to channel this unearned wealth towards productive uses would be to address the regressive nature of the current system of taxing residential property.

Presently, council tax is paid by occupants rather than property owners (with a handful of exceptions). This distinction is important from an intergenerational perspective as younger cohorts are much more likely to be renters whereas landlords are often drawn from older generations. One estimate suggests that people over the age of 50 own 78% of the UK’s privately-held housing wealth. Shifting the council tax burden from low-wealth renters to high-wealth owners would tax those who benefit from house price inflation and improve incentives for working-age renters by allowing them to keep a greater share of their earned income.

The younger generation find it increasingly difficult to afford a home The younger generation find it increasingly difficult to afford a home (Image: Colin Mearns)

An even more regressive feature of the current council tax system is the rate at which different homes are taxed. In my own local community in mid Sussex, a house in the highest band only pays three times as much council tax as one in the lowest, even though its value is eight times higher. This is diametrically opposed to the principle of progressive taxation where the broadest shoulders bear the heaviest burden. Again, this policy disadvantages younger working households who are more likely to occupy smaller dwellings. Levying council tax as a percentage of the estimated price of a home, with the percentage increasing for the most expensive homes, would be a much fairer solution. Moreover, taxing unearned housing wealth would be immune to the growth-dampening effects that plague attempts to raise taxes from working people.

All of this begs the question: if these measures improve equity and enhance growth, while adding to the public purse, why have they not already been put forward? In short, these simple truths are unsayable in British politics because older generations are more likely to vote. But meeting these intergenerational inequalities head-on to give working people the opportunities and incentives needed to grow the economy in the decades to come would be a vital step towards our collective prosperity.

Dr C Rashaad Shabab is Reader in Economics and Director of Student Experience at the University of Sussex Business School. He has a research specialism in lifecycle inequality and is coauthor of the 2024 edition of Statistics for Economics, Accounting and Business Studies, published by Pearson.