One thing we did learn from this week's Budget is that Britain has a problem with generational envy. The reaction to the Chancellor's decision to take away the age-related personal allowances which up till now gave pensioners a slight tax break denied to the rest of us, was widely condemned as a granny tax by a media firmly in the hands of the middle-aged. But it played very well indeed with people in their twenties.
The young generation has a point. Up till now, perhaps because pensioners are growing in number and likely to vote when they have the opportunity, the Government has gone out of its way to shield the elderly from austerity. Any Chancellor seriously looking to save money could have taken the axe to such pensioner perks as winter fuel allowances, free television licences, free prescriptions and free bus passes – or at least put them on a means-tested basis. If it had, the Coalition would not have had to hike university tuition fees and thereby saddle current and future generations with a massive burden of student debt. It is hard to argue that would not have been a fairer outcome and a better one for the country as a whole.
But neither should the young feel excessively sorry for themselves. Many seem to believe that however hard they work, the odds are stacked against them and their generation will never be as well off as the post-war baby boomers now turning 65. Saddled with debt, unable to afford to buy a house, trapped by pay freezes, squeezed by inflation, deprived of pensions and mired in a global recession, what chance will they have?
But every generation thinks it is tough at the time. In the mid-1970s when most of those now retiring were the same age as many of the loudest complainers now, in other words about 30, mortgage rates were up around 17 per cent, which meant more than half of what you earned before tax went in paying the interest if your house loan was three times your income. In addition inflation hit 26 per cent, the top rate of tax was 83 per cent, half the UK banking system and the government finances collapsed, emergency tax relief was rushed out to prevent a cascade of corporate bankruptcy, the world economy reeled when the price of oil quadrupled overnight and there was a national policy of pay restraint. So it was not a bed of roses either, though 1976 was a wonderful summer.
The wider point, though, is that we tend to overestimate short-term problems and underestimate long-term trends. Einstein once said that the most powerful force in the world was compound interest. The fact is that a growth rate of just 1 per cent a year will mean that those currently working will be 33 per cent better off in 25 years' time. A 2 per cent annual growth rate will mean they are 66 per cent better off than those a generation in front of them. In spite of the current recession the UK's long-running growth rate is still thought to be around 2.5 per cent.
Nothing is ever certain in economics, but as long as the economy grows, this generation, like most in the past 200 years, will eventually be better off than the one which preceded it – and that is before another bout of inflation erodes the debt of the young and destroys the savings of the elderly.