Inheritances and gifts: The generational challenge facing the Chancellor at this week’s Autumn Statement

When setting out the challenges facing younger generations – from the hit to pay they’ve suffered post-crisis to the diminishing opportunities to match the housing or pension wealth their parents have– we are often told that it will all be ok once they get their hands on their inheritances. The truth is of course more complex, not least because a reliance on bequests risks exacerbating inequality. In any event, not all inheritances are welcome – as Philip Hammond can testify to.

The difficult legacy he must deal with at this week’s Autumn Statement comes in two parts. The first unwelcome inheritance is the policies passed on by his predecessor, tabled since last year’s election but yet to truly bite. These include income boosts from tax cuts and the welcome National Living Wage, set against £12 billion of working age welfare cuts which more than offset the boosts for lower-income households

The second unwanted gift facing Philip Hammond is economy-based. A combination of disappointing tax receipts in the current year and post-referendum expectations of slower growth mean that the OBR is likely to present the Chancellor with a very sizeable downward revision in its outlook for the public finances.

As recent Resolution Foundation analysis has shown, these inheritances represent bad news for household income growth prospects. They point to a particularly hard squeeze for the ‘just about managing’ families that have been a consistent feature of the Prime Minister’s rhetoric since taking office. But what about her other rhetorical go-to: the ‘struggling younger generations’?

The chart below shows impacts across the age distribution. Now of course, age and generation are not the same thing: for example, younger generations will age into policies currently benefiting older ones in future. A whole lifetime perspective is what’s really needed, but the UK hasn’t had one since 2001 (an evidence gap our Intergenerational Commission is currently plugging). In the meantime this age-based analysis is important because our new government won’t be judged by its rhetoric alone for long, and addressing our housing, productivity and care funding crises to really secure the millennials’ futures probably won’t happen overnight. The short-to-medium-term impacts of the welfare state and economic turbulence therefore have a clear role in either accentuating or ameliorating underlying generational imbalances.

So how do the economic and policy inheritances affect young and old in this parliament? What’s immediately striking from the chart is that the large impact of the worsened economic outlook is fairly evenly spread by age, not surprising when you consider that around half of baby boomers will still be working in 2020 and so particularly exposed to the slower wage growth and higher inflation now forecast. A note of caution then to those who claim that the Brexit decision was imposed by an older generation, insulated from its effects, onto a younger one. When it comes to Brexit at least, we’re all in it together.

But once we add in the effect of policy changes, we can identify clear differences by age. Overall, those in the millennial generation lose out the most in proportional terms – by 4.2 per cent of incomes – and baby boomers the least – 3.1 per cent. (In cash terms it’s generation X that contains the biggest losers, with incomes nearly £1,500 lower, as the table at the end shows.) Just to add to his woes then, it appears that the Chancellor has a generational problem to contend with as well as a ‘just managing’ one.

The good news for Philip Hammond is that his predicament is broadly recognised and there is wide support for his proposed fiscal ‘reset’. By softening or delaying his predecessor’s fiscal targets – and potentially by reversing regressive and poorly-targeted tax cuts – he has the option to create some modest fiscal headroom.

The other bit of good news is that policy options that are best-targeted at the ‘just managing’ are also extremely well targeted at the struggling younger generations (hardly surprising given the ‘just managing’ are predominantly young families with children). The next chart and the table at the end of this note show the impacts of the two options our analysis has prioritised for the ‘just managing’ across the age distribution: reversing cuts to Universal Credit ‘work allowances’ (the amount families can bring home before the benefit starts to be withdrawn), and ending the benefits freeze.

The generational targeting is evident, with these policies boosting incomes of millennials and those in generation X by more than three times as much as the boost for boomers. On average, millennial incomes would be £230 higher as a result, and incomes of those in generation X £300 higher. For the average boomer there would be a smaller boost of £70.

Note, however, the difference in scale to the previous chart. Even taken together, these potential policy options only undo around one fifth of the inherited damage for the millennials and generation X. Longer term them, the new government’s good intentions on greater investment in UK infrastructure, measures to address housing shortages and the need to secure the best post-EU trade deals possible are likely to be what really counts for young and future generations.

But while it’s important that he gets these longer term priorities right, the Chancellor mustn’t take his eye off the near term. His first fiscal statement will set the tone for the remainder of the parliament and can go a long way to changing the outlook for those younger generations fearful that – yet again – they’re about to get what’s coming to them.