Tackling intergenerational unfairness Contents

Chapter 2: Accounting for the future

27.To ensure that there is fairness between generations the Government must think on a generational scale. Successive governments have failed to do this. The Government must plan for the long-term, being transparent about what it believes the country’s needs will be and how it will meet them. It needs to model the effects of its policies on specific generations. In addition, far more data on different generations must be collected and published to ensure a high quality public debate and to hold the Government to account.

Improving governmental processes

28.One repeated criticism throughout this inquiry has been that successive governments have failed to plan ahead. This can be seen in the failures to ensure that there is affordable housing, to plan for an ageing population and to create an education and training system that can respond to coming technological change, as we will explain in the following chapters. A lack of preparation means that younger generations are unable to secure the jobs and housing they need whilst older generations suffer from inadequate support in old age. While there are areas where the Government could improve its analytical ability, Julian McCrae, Senior Adviser to the International School for Government at King’s College London, told us the UK Government compares favourably to other governments in terms of its analytical ability.15 The problem lies in how that analytical ability is used. Government has the capability to model future needs. But Julian McCrae told us that government departments begin a spending review process with “quite reasonable assumptions” but these are then eroded during the process:

“we run an iterative decision-making process and there will be five or six iterations of, ‘This doesn’t quite balance with our political aspirations’. … you push assumptions and build in optimism bias as you go … and you end up with completely unreasonable assumptions.”16

29.Julian McCrae suggested that a positive alternative version of this was when in 2014 the NHS made a public bid for increased spending that “produced a model that linked potentials for efficiency and potentials for future tax funding to an estimate of how demand would move forward”. He stressed that whilst “no models are right and they cannot predict the future” this provided a basis for proper debate of what the needs of the health service were, what efficiencies can be made and how it can be funded. The ability to scrutinise the Government’s modelling of the future level of need would ensure greater transparency about how it will deal with that need and allow us to understand the assumptions behind government spending decisions. Julian McCrae suggested that these assumptions should be established as the parameters within which politicians make “the real decisions about what our tax and spend is going to look like”.17 By making the assumptions and the modelling behind them more transparent we can ascertain when the Government is making political choices with regard to tax and spend and where it is underestimating or overestimating the size of a future problem.

30.The Institute for Government (IfG) has similarly criticised the lack of transparency of the spending review process.18 It also notes that spending plans tend toward optimism bias, fail to focus on risks and move costs between programmes. The IfG has found that there is currently little independent scrutiny of spending plans. It highlights that the Office for Budget Responsibility (OBR), an organisation that provides this sort of scrutiny elsewhere, explicitly makes no judgement on whether policy objectives or programmes can be achieved for the funding allocated to them. Parliamentary scrutiny of spending plans is limited due to the fact that “published settlements include very little detail, and figures are often rounded.”19 The IfG recommends that the Government should publish a statement detailing planned spending and how changes are going to be achieved and that the National Audit Office (NAO) should be invited to comment on whether the modelling and assumptions on which these statements are based are robust.

31.The NAO is itself critical of the spending review process suggesting that it:

“creates a risk that departments and HM Treasury are complicit in agreeing over-optimistic delivery or spending reduction plans that have no realistic chance of being delivered. Departments have their short-term funding needs met; and HM Treasury gets the savings it needs to meet its fiscal targets. Performance problems that begin to appear can be patched up with short-term funding boosts, when the fiscal position makes this possible. Meanwhile the long-standing lack of transparency around performance and value for money has made it extremely difficult for Parliament or citizens to hold government to account for failure to deliver.”20

32.Similar calls for transparency have been made of the government accounting process by the House of Commons Public Administration and Constitutional Affairs Committee.21 As the Government works on its 2019 spending review process this presents an opportunity to improve long-term planning in government and increase transparency.

33.Transparency alone will not improve how the Government plans for the future. Pressure from an independent source is needed in order to ensure that the Government’s modelling represents a fair and accurate picture. The IfG’s suggestion that the NAO be invited to comment on the modelling and assumptions could provide this independent voice. An alternative option put forward by Julian McCrae was for the Government to set up an “OBR for spend which can look at the spending and the forward projections quite seriously and develop some of the models.”22 The House of Lords Select Committee on the Long-term Sustainability of the NHS and Adult Social Care recommended the creation of an Office for Health and Care Sustainability which would monitor and publish data on demographic trends relating to health as well as looking at the workforce implications of these changes and the stability of funding relative to demand.23 Although focused on health, this model addresses the same concerns that we wish to raise. The Government’s response to the Committee’s recommendation suggested that this body would be replicating existing work done by other bodies like the OBR and the Office for National Statistics (ONS).24

34.As the Government is keen not to replicate existing work and not to create new bodies, it could begin by publishing its models for parliamentary scrutiny with a possible role for the NAO in assisting that scrutiny. If the Government is unable to publish models which can inform public debate, then this would strengthen the case for an Office for Spending Sustainability. Reform is also needed in the Treasury to ensure it is focused on long-term sustainability.

35.Successive governments’ short-termism has also caused intergenerational tensions through bad, politically driven accounting choices. One clear example has been the student loan system. Whilst student loans and the cost of a university education to students has caused concern (and will be discussed in Chapter 4) the cost of student loans to the Government has also been a source of intergenerational unfairness. The Chair of the House of Lords Economic Affairs Committee, the Rt Hon The Lord Forsyth of Drumlean told us that the current system of student loans was a “fiscal illusion”.25 Higher Education is funded by students paying upfront fees financed by a student loan. However, most student loans will not be paid off in full, with anything remaining unpaid written off 30 years after they have been issued. Under the current system, only the write off after 30 years appears on the Government’s borrowing figures. This would effectively mean that the cost of educating today’s students would be paid by taxpayers 30 years from now. The House of Lords Economic Affairs Committee concluded that it “is unacceptable to expect future taxpayers to bear the brunt for funding today’s students” and recommended that this should be changed so that current spending reflects the current investment in Higher Education.26 We strongly agree and note the previous flawed policy resulted from politically driven short-termism, enabled by the very lack of long-term transparency we have criticised.

36.Following this recommendation and reports from other committees, the ONS reclassified how student loans will be treated for the purposes of the National Accounts.27 It has stated that an estimate of the amount of student loan that it expects not to be paid off will be treated as current capital expenditure. This change will have a positive effect as it will no longer flatter government spending on Higher Education compared with Further Education (FE). This is a sensible change that we support.

37.The student loan system is not a unique area where government policy has failed to prioritise long-term considerations. The NAO’s report into improving the Government’s planning and spending framework highlighted several policy decisions where the Government appears to be sacrificing long-term value for money for short-term funding decisions.28 This includes capital spending for schools where there “is insufficient focus on routine maintenance to keep school buildings in good condition and prevent more costly problems in the future.” The NAO stated that “HM Treasury’s own success measures prioritise spending control over long-term value for money.”

38.One positive development in recent years has been the development of the Whole of Government Accounts. First published in 2011, these provide a more comprehensive view of the Government’s balance sheet, clearly showing its assets and liabilities, than the National Accounts, which are based on meeting an internationally agreed comparable accounting framework.29 The Government is currently conducting a balance sheet review looking at how it minimises its liabilities and maximises the return from its assets. Julian McCrae told us that whilst this approach can generate some “sensible public policy” it can also generate some “very bad public policy”.30 He suggested that the Treasury were making short-term budgetary decisions to reduce contingent liabilities rather than planning for the future.

39.The contents of the Whole of Government Accounts are controversial. The line over whether something should be included as a liability or is just expected future expenditure is hard to draw. The clearest example of this is the State Pension. Whilst future spending on already promised public sector pensions is included in the Whole of Government Accounts, the State Pension is not. Michael Johnson, Associate Fellow at Bright Blue, argued that the State Pension should be included in the accounts as it should be treated as a right that is secured through National Insurance Contributions (NICs).31 However, currently NICs do not fund the State Pension. The State Pension is part of the social security system, along with other welfare payments, which are not included in the Whole of Government Accounts because it is ordinary government spending. Treating the State Pension as an acquired right and a liability for the Whole of Government Accounts would have implications both for the rate at which the State Pension is increased and who should face NICs. We discuss both these questions in more detail in Chapter 7.

40.Chris Giles, Economics Editor at the Financial Times, told us that successive UK governments had a very poor record of considering their assets and liabilities. He mentioned the student loan system and the recent sale of railway arches which he said were “almost certainly” sold too cheap.32 He suggested that one way to counteract this short-termism would be to have a fiscal rule that is specifically targeted at the balance sheet as is done in New Zealand.33

41.Fiscal rules determine how governments write their budgets. In New Zealand the Public Finance Act sets out its fiscal rules which prescribe that the government must pursue its policy objectives in accordance with multiple principles including, “achieving and maintaining levels of total net worth that provide a buffer against factors that may impact adversely on total net worth in the future”, requiring the government to focus on its overall balance sheet in addition to current spending, and “when formulating fiscal strategy, having regard to its likely impact on present and future generations”.34This long-term approach contrasts sharply with the UK’s approach. The UK’s fiscal rules commit the Government to reducing the cyclically adjusted deficit to below two per cent of GDP by 2020–21 and having debt as a share of GDP falling in 2020–21.35 These both focus on the current levels of spending rather than the Government’s overall level of assets and liabilities. Chris Giles told us that although fiscal rules are “rules of thumb and are not perfect,” measuring them can make them “become more important within government.”36

42.When we raised the positive example set by New Zealand with John Glen MP, Economic Secretary to the Treasury and City Minister, he stated that New Zealand had a different scale of economy with less complexity than the UK.37 He claimed that the UK’s Whole of Government Accounts put us at the “forefront of financial reporting and transparency”. The work done on creating the Whole of Government Accounts and the Treasury’s balance sheet review means that the UK is well placed to manage its assets and liabilities for the long-term. It appears that what is missing is the political will to prioritise this. This would help ensure that the Government has productive assets to pass on to the next generation instead of only passing on expensive liabilities.

43.The Government must think better about the long-term in order to tackle intergenerational fairness. It should create a fiscal rule that addresses the whole of the Government balance sheet, in addition to that focusing on its current spending deficit. It should also improve transparency and accounting of the spending review process by publishing the analytical assumptions behind each department’s initial requests at the start of the spending review to show its perception of the country’s needs over the course of the next spending period. There should also be an independent validation of these assumptions, for example by the National Audit Office.

Data on intergenerational fairness

44.In order to tackle a problem properly, it is essential to understand it. However, there is too little data in the public domain to understand the state of intergenerational fairness fully. To foster a high quality public debate on this subject there should be data on the incomes and assets of each generation, estimates of the effects of current policy on each generation and models of the effects of policies across an individual’s lifecourse. This data should be presented both in terms of current age groups (for example 20–25 year olds have X income in 2017/18) and by birth cohorts (for example people born 1980–1989 have seen their income grow by Y in the last decade). Presenting data like this would allow for discussion of how current age groups are affected, as well as allowing for comparisons of different birth cohorts over time. Currently, there are substantial gaps in the data. The data that does exist is available only to the Government or to researchers upon request.38

45.The ONS has told us that it has recently established a Centre for Inequalities and a Centre for Ageing and Demography, both of which are seeking to improve the amount and quality of data available in these areas. However, these initiatives are in their early stages and large gaps remain in the data available.

46.The lack of data on the intergenerational effects of policy was raised repeatedly during this inquiry. The Rt Hon Frank Field MP told us that the Government did not publish sufficient data on the intergenerational effects of its policies.39 The House of Commons Work and Pensions Select Committee’s inquiry into intergenerational fairness, which Frank Field chaired, recommended that the Government produce an assessment of the intergenerational distribution of private income and wealth as well as the fiscal contributions and withdrawals made by different generations.40

47.Chris Giles told us that whilst the Government published much data on the distribution of income, it did not publish data showing the generational distribution of income despite this being “where all the action in income distribution has been over the last decade.”41 He suggested that the Department for Work and Pensions (DWP) should publish this breakdown. When we put this to Alok Sharma MP, Minister of State for Employment, he stated that the Department makes the relevant Households Below Average Income (HBAI) data set available to researchers.42 However, as Chris Giles told us, this data would “be much more powerful if it came in an official government report.”43 Iain Walsh, Director of Labour Market Strategy and International Affairs at DWP, informed us that the HBAI data set goes back to 1994 and that the Government could provide a breakdown of what has happened to different cohorts within those 20–25 years.44 He suggested that data from before 1994 was based on a different survey which had a lower sample size and therefore was not suitable for breaking down into age groups or birth cohorts. Given that the Government is able to publish a 20 year time series of the income distribution between birth cohorts and could publish this breakdown by cohorts alongside its other data on income distribution, it is unclear why it has yet to do so.

48.Chris Giles suggested that the Office for National Statistics should publish generational breakdowns of the Wealth and Assets Survey (WAS) in order to provide similar information on the wealth of different cohorts.45 WAS has substantially fewer previous releases than HBAI as it was launched in 2006 and is a biennial rather than annual survey.46 This means that there would be limited use in a special release of a time series of the data to date, but a breakdown by age groups or birth cohort could be included alongside other breakdowns in future releases.

49.Both Chris Giles and Professor James Sefton, Chair in Economics at Imperial College London, suggested that the WAS’s coverage of gifts and transfers within families could be improved.47 Professor Sefton highlighted the lack of information on the socioeconomic group of those who give gifts. Another limitation of the WAS is that it only provides information on gifts and transfers over £500.48 An alternative source for data on intergenerational transfers is the Understanding Society survey which can provide data on smaller gifts49 and can, when combined with its predecessor the British Household Panel Survey, be used to create matched pairs of parents and children for information on who gives transfers.50 However, this survey is not as specialised as the WAS and cannot provide as detailed data on wealth.

50.As with income distribution and wealth distribution there is a relevant ONS data set which could provide more information on the generational effects of tax and benefits. Professor Sefton told us that the ONS’s Effects of Tax and Benefits on Household Income data set uses information from the Living Costs and Food Survey to allocate in-kind consumption and provide a “good picture of the intergenerational distribution of government resources.”51 This data estimates the amount of tax households pay across a variety of direct (income tax, National Insurance etc.) and indirect taxes (VAT, Council Tax etc.), the amount of social security payments households receive, as well as an estimate of the value of education, health and other support they receive from the Government.

51.The most recent release of the ONS’s Effects of Tax and Benefits on Household Income data provided a high-level breakdown of the overall level of total tax, benefits and various services different age groups receive.52 However, it did not contain the detailed data on individual tax and benefits which the data set can produce. A time series breaking down the tax paid and benefits received by different birth cohorts would be a valuable resource in understanding the effect of government decisions on different generations.

52.The UK Statistics Authority should prioritise improving generational statistics. This work should begin by the Office for National Statistics introducing a generational breakdown of the Effects of Tax and Benefits on Household Income data set and releasing a backdated time-series of this data. The Office for National Statistics should also investigate ways to improve the Wealth and Assets Survey’s coverage of gifts and inheritances as well as publishing a generational breakdown of the survey’s findings in each release. In addition, the Department for Work and Pensions should introduce a generational breakdown of the Households Below Average Income data set in its annual release and publish a backdated time-series of this data.

53.Whilst the ONS and DWP’s survey-based data sets can provide a historical record of the effect of policy on different cohorts, there is a lack of information on the predicted future effects. Lindsey Whyte, Director of Personal Tax, Welfare and Pensions at the Treasury, told us that the Treasury tends to use static analysis looking at the effects of suggested policy on different age groups.53 She told us that the Treasury will “look at individual measures for a fiscal event, using, as far as we can, the micro-simulation model we have to look at tax and benefit reforms, which would give us a snapshot of the implications for different age groups.”54 However, whilst in each budget the Government publishes the results of these models in a distributional analysis for income, it does not provide a similar summary of the effects of the budget for each age group.55

54.More concerning is the lack of government analysis of the long-term effects of its policy on different cohorts as they age. Iain Walsh from DWP told us that the department has PENSIM, a pension simulation model which looks at the effects that possible pension changes could have on future cohorts,56 but no other examples were given of government departments using this sort of long-term cohort modelling. Lindsey Whyte told us that there is very limited data on people’s life cycle and that the Treasury does not look at whether a cohort has been or will be a net contributor to the Exchequer.57

55.One particular government weakness is a lack of work on generational accounts. Generational accounts are a way of measuring the financial sustainability of the Government’s tax and spending decisions. These accounts model current policy projected forward to see if future generations would have to pay more tax to finance the spending on current generations if nothing changed. Professor Sefton told us that “because of demographic ageing, it seems that current tax and spending plans are unsustainable and will have to be rebalanced—otherwise, current unborns will … inherit a large government debt from the older generations”.58 Lindsey Whyte stated that the Government does not undertake generational accounting analysis but instead monitors “the work that various think tanks, such as the IFS, are doing in developing that capability.”59

56.Since 2001/02 government gross debt has risen from 33.7 per cent of Gross Domestic Product (GDP) to 85.4 per cent of GDP in 2017/18.60 The Government has not quantified to what extent this additional spending is investment meant to benefit future generations. Investment in generational modelling of its policies would allow the Government to better differentiate where it is investing in the future and where it is unjustly passing on debt to future generations who will not benefit from its spending. Michael Johnson suggested that the Government should produce Intergenerational Impact Assessments to accompany draft legislation which “explicitly quantify the extent to which costs are being deferred” onto future taxpayers.61

57.Frank Field suggested that the reason for the lack of data on intergenerational fairness was a lack of political will.62 The reliance on external academics to analyse income and wealth distribution data, as well as a reluctance to publish existing Treasury analysis suggests that it is not a political priority. This low priority can also be seen in the Government’s reliance on external organisations to develop generational accounting rather than working to develop their own models.

58.The Treasury must do more to generate and publish data on intergenerational fairness. It can immediately begin by producing a distributional breakdown of the effects of each budget by age group using the static models it already has. It should invest in developing its capacity to model the generational effects of tax and benefits policies.

59.The Government should create Intergenerational Impact Assessments for all draft legislation indicating how it will affect different generations.

15 Q 172 (Julian McCrae)

16 Ibid.

17 Ibid.

18 Institute for Government, The 2019 Spending Review: How to run it well (September 2018) p 4, p 21: https://www.instituteforgovernment.org.uk/sites/default/files/publications/IfG_2019_%20spending_review_web.pdf [accessed 18 January 2019]

19 Ibid.

20 National Audit Office, Improving government’s planning and spending framework (November 2018) p 62: https://www.nao.org.uk/wp-content/uploads/2018/11/Improving-government%E2%80%99s-planning-and-spending-framework.pdf [accessed 18 January 2019]

21 Public Administration and Constitutional Affairs Committee, Accounting for Democracy Revisited: The Government Response and Proposed Review (Sixth Report, Session 2017–19, HC 1197)

22 Q 176 (Julian McCrae)

23 Select Committee on the Long-term Sustainability of the NHS, The Long-term Sustainability of the NHS and Adult Social Care (Report of Session 2016–17, HL Paper 151)

24 Department of Health and Social Care, Government response to the Lords Select Committee report on Long-term Sustainability of the NHS and Adult Social Care, Cm 9504, February 2018: https://www.parliament.uk/documents/lords-committees/NHS-Sustainability/Gov-Resp-NHS-Social-Care.pdf [accessed 18 January 2019]

25 Q 116 (Lord Forsyth of Drumlean)

26 Economic Affairs Committee, Treating Students Fairly: The Economics of Post-School Education (2nd Report, Session 2017–19, HL Paper 139)

27 Office for National Statistics, ‘New treatment of student loans in the public sector finances and national accounts’: https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/articles/newtreatmentofstudentloansinthepublicsectorfinancesandnationalaccounts/2018–12-17 [accessed 18 January 2019]

28 National Audit Office, Improving government’s planning and spending framework (November 2018) p 9, p 48: https://www.nao.org.uk/wp-content/uploads/2018/11/Improving-government%E2%80%99s-planning-and-spending-framework.pdf [accessed 18 January 2019]

29 National Audit Office, ‘Report of the Comptroller and Auditor General: Whole of Government Accounts 2015–16’: https://www.nao.org.uk/report/report-of-the-comptroller-and-auditor-general-whole-of-government-accounts-2015–16/ [accessed 4 February 2019]

30 Q 171 (Julian McCrae)

31 Written evidence from Michael Johnson (IFP0074)

32 Q 173 (Chris Giles)

33 Q 176 (Chris Giles)

34 Public Finance Act 1989, section 26(G)(1)

36 Q 176 (Chris Giles)

37 Q 233 (John Glen MP)

38 The UK Data archive contains much of the data which we would like to see published but is only provided to registered researchers and requires specialised software and research expertise to use.

39 Q 104 (Frank Field MP)

40 Work and Pensions Committee, Intergenerational Fairness (Third Report, Session 2016–17, HC 59)

41 Q 172 (Chris Giles)

42 Q 214 (Alok Sharma MP)

43 Q 172 (Chris Giles)

44 Q 214 (Iain Walsh)

45 Q 172 (Chris Giles)

46 Office for National Statistics, ‘Wealth and Assets survey QMI’: https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/debt/methodologies/wealthandassetssurveyqmi [accessed 18 January 2019]

47 Q 172 (Chris Giles, Professor James Sefton)

48 Office for National Statistics, ‘Intergenerational transfers: the distribution of inheritances, gifts and loans, Great Britain: 2014 to 2016’: https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/articles/intergenerationaltransfersthedistributionofinheritancesgiftsandloans/2018–10-30 [accessed 18 January 2019]

49 As seen in Social Market Foundation, Britain’s Family Bank (September 2018): http://www.smf.co.uk/wp-content/uploads/2018/09/Britains-Family-Bank-1.pdf [accessed 18 January 2019]

50 As seen in Resolution Foundation, House of the rising son (or daughter): The impact of parental wealth on their children’s homeownership (December 2018): https://www.resolutionfoundation.org/app/uploads/2018/12/House-of-the-Rising-Son.pdf [accessed 18 January 2019]

51 Q 172 (Professor James Sefton)

52 This data is the basis for Figure 7 and Figure 8 in Chapter 7.

53 Q 39 (Lindsey Whyte)

54 Q 40 (Lindsey Whyte)

55 HM Treasury, Impact on households: distributional analysis to accompany Budget 2018 (October 2018): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/752045/impact_on_households_distributional_analysis_to_accompany_budget_2018_web.pdf [accessed 18 January 2019]

56 Q 40 (Iain Walsh)

57 Q 40 (Lindsey Whyte)

58 Q 169 (Professor James Sefton)

59 Q 39 (Lindsey Whyte)

61 Written evidence from Michael Johnson (IFP0074)

62 Q 109 (Frank Field MP)

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