To maintain our welfare state we need to rethink how we pay for it

Published on Intergenerational Commission, Tax and Welfare

Social democracy gave 20th Century Britain the welfare state. But in the 21st Century it’s wandered off for a long post-crisis snooze, just at the time when big challenges to that welfare state are looming into view. It’s time it woke up because, for a new generation of social democrats, there is work to do.

We each cost the state when young, pay in when working and then rely on it again in retirement. But it’s not just individuals that give and take different amounts from the welfare state – generations do too.

The ‘silent generation’, born before war, founded the welfare state and paid for it, despite not benefiting from its expanded education system or recent moves to make state pension more generous. As a result they are the generation that has put most in compared to what they took out.

The baby boomers got a much better deal, benefitting from the expansion of the welfare state, rising longevity, and an underpinning assumption in Britain’s ‘Pay As You Go’ welfare state that the rising costs of their old age will be passed onto later generations. They are Britain’s welfare winners, who we project will take out over a fifth more than they will have put in.

But what about younger cohorts, from Generation X onwards? This is what the missing in action social democrats should be focused on. Maybe they will be able to continue passing on ever increasing costs, principally for health care, onto those that come after them via ever higher taxes on the working age population.

But more realistically, maybe not. Office for Budget Responsibility projections show that maintaining current levels of state provision would mean spending as a share of GDP increasing by seven per cent by 2066. Without action that would mean debt rising to 230 per cent of GDP. Meeting this cost would be equivalent to raising total tax revenues today by £160bn a year. Such an increase is clearly possible – it would bring the UK into line with Germany – but it would be a huge shift. And if done solely through higher income and consumption taxes on the working age population, it would also represent a big drag on their living standards.

Social democrats should be deeply concerned that wandering down this path by default could instead lead to another scenario – reduced public support and then major cuts to the welfare state that previous generations of social democrats fought so hard for.

To date there has been very little engagement with this challenge. Since 2010 the debate has been about short term deficit reduction. More recently it has got stuck on whether hypothecated tax rises are a good idea – rather than the real questions: what tax is going to rise and who is going to pay it. Labour’s 2017 manifesto did propose a big (funded) state expansion – but mainly for new promises such as free university education.

So, if we want to maintain the welfare state we’ve inherited, we need to question the assumption that additional costs must entirely fall on current or future working age populations. In its place social democrats should ask, what is undertaxed in 21st Century Britain? The answer is wealth, which has more than doubled compared to our national income since the 1980s while the tax take hasn’t shifted. This is particularly relevant given that half of our wealth is owned by the cohort who are approaching retirement.

Starting a debate about taxing wealth isn’t easy. But the alternatives are stripping back our welfare state or very large tax rises on working people. Neither of these are easy either, and nor are they desirable.

A new, fairer and more balanced funding approach could help square the circle of keeping our welfare state on a sustainable footing and ensuring an equitable distribution of resources across generations. Here’s hoping social democracy wakes up in time to make that happen.

 

This post originally appeared in The Times Red Box