Young people benefit from austerity

First-time voters don't realise that Labour policies are aimed at the old not them.

by Luke Johnson
Last Updated: 06 May 2015

It is ironic that the Labour party's voting base is strongly skewed towards the young because the philosophies and policies it promotes are heavily biased in favour of the old. The young should be welcoming austerity: they will be the main beneficiaries.

Let me explain: Labour believes in more public spending and increased state borrowing to pay for it all. This represents current expenditure – mostly on the old - afforded by an obligation on future generations. Government debt must be serviced, and either repaid or rolled over, all of which represents a long-term burden.

The single biggest item is pensions, at £155bn. Clearly only those aged 60 and over qualify for these payments. Unfortunately the state pension system is not funded: despite the contributions of taxpayers over the decades, these sums are paid from current tax receipts, not sums saved in the past. This is therefore a direct transfer from young working taxpayers to the retired.

The next largest element of public expenditure is the NHS, projected at £135bn in 2016. For almost all of us, a large proportion of healthcare spending is incurred towards the end of life. Some estimates suggest between 25% and 50% of total outlays are spent during the final year before death. With rising life expectancy, a very large and increasing proportion of NHS budgets is devoted to the elderly. By contrast, very few young people have any need of the NHS at all – they rarely visit their GPs, let alone hospitals.

These two figures represent almost 40% of all public spending. Other categories like education do focus on the young, but even there – and across most other categories of public spending - public sector pensions are a major element. And of course they are essentially a transfer from the young to the old. Some have estimated their cost is as high as £40bn a year.

Labour may pretend that it is the party that believes in equality. Intergenerational fairness is a big part of that. But its core support base – public sector workers, the unions and so forth – do not actually want such 'social justice', despite their rhetoric. Most strikes now are about protecting gold-plated pensions – not about investing in the future, for example. As ever, vested interests are at work. Unfortunately for them, the young are much less well organised than those that in effect represent the old – such as unions and the Labour party.

I think it is no coincidence that the best book on this subject, The Pinch: How the baby-boomers took their children's future – and why they should give it back, is by a Tory, ex-minister David Willetts. I hope those twenty and thirtysomethings voting Labour realise what they are voting for.

I think one of the main reasons younger people do not vote according to their best interests is because they mostly do not understand how money is organised. I do not mean that they should study economics more. What they so often lack is even a rudimentary comprehension of how basic financial services work.

I suspect most people in their 20s do not know the basic mechanics of mortgages, pensions, bank loans, savings, investments or insurance. They are buying fewer homes and cars, and so they are not being forced to learn how to fund these assets. I recently described how a mortgage works to my nephew and niece, who are contemplating buying a flat. They had blank faces when I used the phrase 'amortisation of principal'. They did not realise you have to insure a home. They were prepared to accept the first mortgage they were offered, without shopping around – even though it might prove enormously expensive.

These important issues should be taught in schools. If citizens want to lead organised lives then they need basic financial literacy. Otherwise they remain ignorant of how society administers itself, or are too often exploited by unscrupulous banks and other financial intermediaries. Sadly, the entire financial services industry takes advantage of the general population's reluctance to do its homework, read the small print and negotiate when it comes to everything from bank accounts to insurance policies to mortgages to pensions to consumer loans. So I believe a thorough grounding in the jargon and technicalities of financial services should be part of the National Curriculum from the age of, say, 14. That way the next generation will be better prepared for adulthood, and the responsibilities of buying a car or a home, organising their finances and providing for their old age.

One event I recommend entrepreneurs avoid is the World Entrepreneur of the Year, held next month and hosted by accountancy firm EY. I was a judge for the UK version a couple of years ago. It was held in a dingy basement in Victoria and was an unpleasant experience. I give my time free to such things because I believe in the cause of entrepreneurship.

But not so EY, it seems. It isn't enough that it promotes its brand obsessively in all the publicity for its contest. It also wants to charge any entrepreneur foolish enough to attend the four-day junket in Monaco EUR3,500. This fee excludes accommodation and flights, by the way. Headline speakers include Bill Ford and Jessica Alba. Neither of them is exactly my idea of an entrepreneur.

As Somerset Maugham said, Monaco is a 'sunny place for shady people'. Is that what EY is promoting?

Luke Johnson is chairman of Risk Capital Partners.

Follow him on Twitter: @LukeJohnsonRCP

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