As Chancellor Rachel Reeves gets ready to deliver her maiden Budget… Today, she argues, it is vital to the UK’s long-term successful management of national debt. The national debt has eclipsed almost 100% of GDP. In return, Reeves would require any tax increase to be justified as an unavoidable action to restore fiscal integrity. Just a month after taking office, in October 2024, she presented her first budget. This package included a hike in employers’ National Insurance contributions, widely thought to already be hitting hire rates for jobs affecting younger populations.
The forthcoming 3pp increase in employer National Insurance contributions has been hugely controversial, with fears that it will price younger people out of employment opportunities. Employers cite increased unwillingness to hire due to the increased costs imposed by this tax. Here’s the problem Young job seekers are confronting increasing difficulty in finding a good first job. This complicates their financial situations even more.
During that same span of time, the economic gap between generations has steadily increased. Those aged 65 and over have done extremely well, with £900 more in their pockets on average each year. The under 65s have experienced a cut of around £1,400 per year. This trend is indicative of a worrisome trend in federal resource allocation towards older citizens and away from younger Americans.
The government has previously announced raising the state pension age to 66. New projections indicate that it will continue to increase for those born after 1990. The 65-and-older population is about to double. It will explode from 13 million today to 22 million in as little as the next half-century. This latest demographic shift will put even more pressure on public finances. Treasury estimates show that government spending on the state pension will likely increase to almost 8% of GDP over the next 45 years due to commitments associated with the triple lock system.
The triple lock guarantees that state pension payments increase either by inflation, average wage growth, or a fixed percentage, whichever is highest. Since the state pension’s introduction in 2010, its value has skyrocketed. This aggressive expansion has widely exceeded average wage growth and caused intense fiscal stress. If we only link the state pension to increases in average wage growth, it would experience a slight increase. By 2070, its share of GDP would increase from 5% today to 6%. Even with more manageable growth in pension spending, expenditures related to old-age will still probably cause national debt to skyrocket. Continuing this trend is already a recipe for fiscal disaster.
Adding insult to injury are recent government cuts to working-age benefits, such as housing benefit, unemployment benefit and universal credit. Older young adults and young families with children have been impacted most severely by these cuts. They tend to be more reliant on this support during difficult economic circumstances. Unfortunately, the latest members of our American family—Generation Z—born between 1997 and 2012—are shouldering an even greater financial load. Escalating university tuition costs and a diminishing safety net have only further exacerbated their struggles.
In response to these growing inequities, Reeves aims to address the imbalance through her Budget by recalibrating how both tax and benefit systems treat different age groups. By implementing policies that consider the financial challenges faced by younger generations, she hopes to foster a more equitable economic environment.
Reeves’ proposal is the rare fiscal policy big enough to match the moment. It helps ensure that the needs of younger citizens are given priority rather than favoring older, more affluent demographics excessively. Her efforts would help counterbalance the long-term impact of today’s benefit cuts and future increased costs as a result of aging populations.