Anthony Hilton: Will ‘generation rent’ really be worse off than their parents?

One of the reasons Donald Trump is doing so well is that many of the present younger generation of Americans do not believe they’ll be wealthier than their parents.

There is a similar undercurrent over here, though not, perhaps, as aggressively expressed. Under-35s have been known to complain that “their parents had it all” whereas they have been saddled with massive student loans, cannot afford to buy a house, and can only look forward to a frugal old age. Meanwhile their parents and grandparents live in cocooned luxury on generous pensions and the extortionate rents they charge as buy-to-let landlords.

This understandable disgruntlement has been further fanned by a strand of free-market economists who focus on how government spends much more than it raises in taxes.

They say it is unfair and immoral to finance their high living with borrowed money and saddle their children with massive debts.

They have a point but are perhaps not being totally honest in their motives because theirs is a political more than an economic concern.

Previous generations have often inherited much greater burdens. Today government debt is around 80% of GDP. At the end of the Second World War and, indeed, at the end of the Napoleonic war it was 250%. For most of the Victorian era and in the inter-war years it was above 100%. What is often dressed up as concern over inter-generational debt and fairness is often simply a cover for slashing government spending and reducing the role of the state.

Nevertheless, it is important and PwC, the consulting firm, hosted a seminar where three different age groups examined the issue of inter-generational fairness.

It considered whether there is a genuine problem and, if there is, whether tax policy could be used to alleviate it.

This initiative follows on from a successful programme last year which sought to engage the public more generally on tax. It is all part of a drive to create greater public awareness of the issues and complexities at the heart of policy.

They hope in time this will lead to a better-informed debate on how the system might be reformed.

But it is worth challenging some of the assumptions of what is unfair. It is certainly true that a lot of today’s young people have massive student loans whereas their parents did not. In theory, they should begin to repay these when their income passes a certain threshold. Conceptually, therefore, the loan can be thought of, not as a lump sum, but as an obligation to pay a higher rate of income tax on higher earnings.

On this basis of comparison, the parents had a much worse deal. The present standard rate of income tax is 20p in the pound, whereas back in 1975 it was 35p. The top rate of tax today is 45p in the pound whereas in 1975 it was 75p. The rate of income tax paid by a young person today — including the additional “tax” of student loan repayments — is still significantly less than the rate of income tax their parents paid (and most did not get the university education in return).

Housing is a real issue but again not as clear cut as you might think: much is made of the fact that the proportion of owner occupiers is dropping from a 2003 peak of 70.9% to around 65% today. It is, however, still well above the proportion of owner-occupiers of 1975 when it was around 50% according to a paper from the Institute of Fiscal Studies. “Generation rent” was bigger then than it is now.

The real surge in owner occupation came in the Eighties when Margaret Thatcher as prime minister thought it would increase the number of Conservative voters if she gave council-house tenants the right to buy their rented home at a substantial discount to market prices.

Those who benefited certainly got a better deal than anything on offer to today’s young people, but it was a disastrous policy for the country in that it killed off council-house building. It haunts us today as we have a chronic shortage of affordable homes to rent.

If London housing is more out of reach today than it was 40 years ago it is also because of the influx of seriously rich people from Russia, Asia the Middle East and, of course, the financial services sector.

The inflation at the top has driven up prices all the way down. The balancing item — which some will appreciate more than others — is that all that money at the top also supports a much higher quality and range of restaurants, bars and entertainment, and makes London a far more attractive city than it was back then. You pay more but get a better experience — but that is scant compensation of you can’t afford to live here at all.