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A version of the article published below by our CEO, Nigel Wilson, originally appeared in The Times on 31 March 2016.
“The Who” got it wrong: my baby-boomer generation did not “die before we got old” – instead we rewarded ourselves with free education, housing, healthcare and pensions. We created intergenerational unfairness which needs replacing with intergenerational collaboration.
Politicians see the UK economy primarily as a Profit and Loss problem. The UK’s P&L consists of money raised through tax – £670bn this year – minus money spent on government services – £740bn – with a resulting £70bn deficit. We spend around £170bn annually on welfare, excluding pensions, and policy specialists as diverse as Frank Field and Angela Merkel know the modern welfare state is unsustainable: my generation can’t just pass the bill for all our free “stuff” to our children.
The UK’s P&L, assisted by “smart” accounting and the OBR’s helpful forecasts, would be a headache for any business, and ultimately, like any factory, if we can’t produce enough to pay for ourselves, we need either cost savings (austerity) or investment to improve productivity. But austerity is difficult and unpopular, and investment requires a strong Balance Sheet.
The UK’s Balance Sheet, or “Whole of Government Accounts”, is produced annually. For 2013-14 it shows UK liabilities of £3.3 trillion – around £100,000 per working adult. A large component is unfunded public-sector pensions at £1.3 trillion, which grew by £130bn last year and possibly the same again this year. These liabilities are not all paid at the same time, but they do appear to be unsustainable.
Commentators hardly ever talk about the Whole of Government Accounts or the scale of our national liabilities, but historically the biggest economic reforms have been Balance Sheet events. Bevan and Beveridge – particular heroes of mine – did this when they created the NHS and the Welfare State in the 1940’s, as did Thatcher and Heseltine’s in the 1980’s. Today’s global “trend to zeroes” across growth, interest rates, inflation, productivity gains, and real wages – means we need a similar generational change.
Fortunately there are measures that could help both the asset and liability sides of the national Balance Sheet. They require a long-term vision, political will and positive, constructive public-private intergenerational collaboration.
On the asset side, conditions are right for massive investment in real assets, with the added benefit of creating real jobs. Post QE, the world is awash with money – there has never been so much money available, and yet so badly-allocated. With negative yields and interest rates in many markets, investors need to accelerate the shift from financial assets – especially the synthetics that compounded the credit crisis - to real assets. We need to invest in the new, rather than just inflating the price of existing assets.
This means much more housing – 250,000 new homes per year - to address our longstanding supply crisis. It must include high-quality, industrial-scale build-to-rent and housing tailored to senior citizen “last time buyers”, as part of the regeneration of our tired cities and towns. Much of the UK is not over-built, but under-demolished, and it needs replacing. We also need clean, cheap and green energy that uses the advances in solar and wind technology. New hospitals can be centres of excellence in using technology – we need much more digital healthcare. And we need better transport: not grandiose schemes that take a generation to create, but projects of between £100m and £1bn that deliver a rapid economic multiplier effect to local economies and city regions.
We can be optimistic that Andrew Adonis’ Infrastructure Commission is on the right track, and Legal & General is committing to billions of pounds of investment in UK real assets. The private sector can do much more: we need to value and reward investment for the long-term; making more use of equity as opposed to debt; and deploying our best brains not in regulation and regulatory consultancy, but in helping our many innovative start-up companies to become grown-ups.
That way, we can create jobs with growing real wages, affordable housing and quality infrastructure for the next generation.
On the other side of the balance sheet, bold, intelligent welfare reform needn’t be unfair or punitive. A fairer, flat rate Pension Tax Relief delivering over £10bn of savings was judged politically undeliverable in the Budget, even though 80% of the higher-rate beneficiaries only pay a basic rate of tax in retirement. But it must remain on the agenda if the Boomers and the Millennials are to have a level playing-field.
Pensions Auto-enrolment is a huge success with 92% of people opted-in – its digital “plumbing” can be built upon to deliver other low-cost forms of financial resilience for households. Helping people to save against financial “rainy days” would be one example, more affordable cover against loss of earnings through sickness or unemployment would be another, as would provision for care-costs in old age. Legal & General is working on these genuinely contributory alternatives – we call this programme “Beveridge 2.0”.
These alternatives can provide better replacement rates for lost income, cheaper than National Insurance. NI is a regressive, punitive tax on the low-paid: a burden that should be lifted from the lowest earners. The state must support the worst-off and those with chronic conditions, and do so decently. But short-term, “transactional” benefit claimants should be able to make better value choices. This is what the original Beveridge Report proposed, and what we intend to deliver.
Our economy and society is undergoing massive change. External economic pressures are high, we have an ageing population and digital is changing the workplace beyond recognition. Despite money-printing and historic low interest rates, we seem to have forgotten how to grow or invest. As in 1945 or 1979, long-term thinking and leadership is required – we need a new assessment of how the national Balance Sheet – not just the P&L – should evolve for the next generation.
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Notice: The image used of the cover of "My Generation" qualifies as fair use and is solely used to illustrate the audio recording in question.