How the Baby Boomers broke Britain

Much has been written on the dire outlook for the UK, made painfully clear in last week’s budget unveiled by the hapless Chancellor, Rachel Reeves.

The country is in a fiscal and economic straitjacket, with taxes being hiked into lower growth. It might even be, as was argued recently by Jonathan Oppenheimer, “uninvestable”. Last week’s budget may be proof that the UK has ceased to be a competitive economy, perhaps even a developed one.

But to attribute this solely to the current Labour government would be both facile and wrong. They inherited a mess. It is sad to witness how lost and divided what had been hoped to be a dynamic and clear-sighted Labour government has been. However, the problems began long before it was elected to office.

For two decades, the country has been held hostage by a voting bloc which refuses to accept fiscal gravity. Rather than acknowledge the costs of their own entitlements, they preferred to blame immigrants, Brussels, “elites” or whoever else appeared on the front page of the Daily Mail. The culprit is hiding in plain sight: the post-war baby boomer generation, coddled by the welfare state they now insist is sacred and immovable.

The unsustainable welfare state

Consider the numbers. Almost 50% of all public spending now goes on two items – social security (welfare and pensions) and health. Of that welfare spending, 55% flows to pensioners. Health consumes about 20% of the budget, up sharply since the 2000s. According to the Resolution Foundation, pensioner spending has grown far faster than working-age support, which has stagnated despite rising need. Britain’s welfare state has quietly transformed into a transfer machine from the young to the old.

The engine of this largesse is the triple lock, a piece of fiscal engineering so reckless it could only have been devised by the most naïve and damaging UK government in recent history – David Cameron’s Tory party.

Introduced in 2011, while the Conservatives were in coalition with the Liberal Democrats, it promised that the state pension would rise by whichever was highest: wage growth, inflation or a completely arbitrary 2.5%.

When wages fall in real terms, pensions still rise. When inflation spikes, pensions surge. Over time, the system ensures that pension incomes outpace not only working-age benefits, but economic reality.

The Institute for Fiscal Studies estimates that by 2050, the triple lock could cost the UK more than R903-billion (£40-billion) annually, and the Office for Budget Responsibility estimates the triple lock costs billions more each year than traditional indexation.

Political suicide

Politicians know this. They also know that suggesting reform is political suicide.

When the Conservatives proposed replacing the triple lock with a “double lock” in 2017, pensioners revolted so fiercely that Theresa May’s campaign nearly collapsed, with the Tories almost losing to Jeremy Corbyn’s Labour Party. The policy was buried before polling day.

Pensioners are Britain’s most powerful voting bloc. Turnout among voters aged 65 and above regularly exceeds 75-80%, and they overwhelmingly dominate the marginal seats any party needs to win in the Midlands, North West, Yorkshire and Wales. The triple lock polls at 70-80% support among pensioners, with even a majority support among older working-age voters.

It is far easier to squeeze professionals than pensioners. Last week, the chancellor’s main revenue-raising measure, a three-year freeze to personal allowances, is telling.

Frozen tax thresholds quietly drag more earners – particularly mobile workers, property investors and those in London and the South East – into higher bands.

The theoretical marginal tax rate for a professional earning R2.2-million (£100,000) will now be 62%. This will hit those whose real wages have already been eroded by stagnant productivity, rising living costs, soaring rents and, in many cases, force them to reconsider the UK as a place to make their future.

To make matters worse, Brexit’s effects on the economy and public finances - supported by 65% of those voters over 65, according to YouGov - have been far worse than forecasted.

It has decimated growth, increased costs and driven away workers. But for many boomers, the real threat was never the fiscal time bomb of their own benefits; it was “foreigners” and access to the European common market.

Europe is different

The UK is hardly unique in its predicament, even if the perfect storm of problems confronting the once proud country now cut adrift in the North Sea is particularly acute.

On the continent, it is instructive that the countries managing their pension and welfare liabilities best are those which were forced into making painful but necessary reforms during the Eurozone financial crisis.

Spain’s crisis-era reforms in 2011, Greece’s Troika-driven restructuring, and Italy’s 2011 Fornero reform under technocrat Mario Monti have left those countries with lower deficits and somewhat brighter fiscal outlooks than France for example, which has repeatedly failed to pass meaningful changes (aside from Emmanuel Macron’s contested move to raise the pension age to 64).

Germany’s governing coalition was riven last week over pension reform, but at least managed to pass a compromise, in an illustration of realism and maturity that Britain and France have lacked.

Rational desperation

Compounding the dilemma for Millennials and Gen Zs is that Baby Boomers, particularly in the UK, but also in other countries such as the US, have been the chief beneficiaries of the largest accumulation of private wealth in the past four decades – the housing boom.

While UK homeowners sitting on multimillion-pound homes might grumble about higher property taxes, they are at least not confronted by the reality of many professionals who endure record-high taxes and skyrocketing rents. Increasingly, many are voting with their feet, with mobile taxpayers looking toward lower tax jurisdictions, such as in the Gulf.

This bleak reality is shaping Gen Z behaviour. As John Burn-Murdoch has written in the Financial Times, young British renters who have little hope of cobbling together a deposit are much more likely to take financial risks – from online betting or speculative crypto investing – than their contemporaries who are on or within reach of the housing ladder.

This is not fecklessness, but a rational response to worsening economic prospects, including higher taxes, daunting living costs and the increasing unattainability of home ownership.

The UK is an extreme example, but these realities apply more broadly.

Until older voters come to terms with the necessary adjustments to welfare states that were products of a different economic and demographic era, the long-term decline of the West is inevitable.

The Baby Boomers did not merely break the system. They are holding the wreckage hostage. DM

Natale Labia writes on the economy and finance. Partner and chief economist of a global investment firm, he writes in his personal capacity. MBA from Università Bocconi. Supports Juventus.