Business World

Tuesday 18 September 2018

Lagarde calls for tax hike for older generation to support young people

IMF managing director Christine Lagarde Photo: AP
IMF managing director Christine Lagarde Photo: AP
Donal O'Donovan

Donal O'Donovan

European tax systems should be turned around so that older people, who are wealthier, contribute more and the young are better supported, according to IMF managing director Christine Lagarde.

She was speaking after a new report from the IMF found that austerity measures in the wake of the financial crisis exacerbated an existing generational divide - with younger people in Europe increasingly left behind in areas like housing, wages and job security.

The fact that older people are more inclined to vote, means politicians tend to run with policy measures that favour them, she said at the World Economic Forum, in Davos.

The risks of intergenerational conflicts within developed nations is increasingly attracting the attention of the business and political elite gathered here in Switzerland, not least because of the electoral implications.

In an article written to coincide with the IMF report, Lagarde quoted the poet Langston Hughes's line: "What happens to a dream deferred?" Since the crash young people in Europe are, in essence "putting their dreams on hold", she said. IMF data shows younger people suffered greater and longer lasting consequences of the great crash even if overall inequality didn't increase, she said.

As French finance minister during the early period of the financial crisis, Ms Lagarde was party to many of the key decisions in Europe, however she said action needs to be taken to redress the effects of those policies on young people. "Without action, a generation may never be able to recover." "Beneath the topline numbers, however, there is a worrying trend: the gap between generations in Europe has widened significantly. Working-age people, and especially the young, are falling behind," she said.

Incomes that declined for young people after 2007 have recovered, but not grown, she said.

Greater investment in education and lower labour taxes, such as PRSI, for those on lower incomes will help, she said. Social welfare should be adapted so that younger people are better protected if they lose their job, she said.

That approach contrasts strongly with the current Irish situation, where reduced rates of social welfare are paid to younger jobseekers, and where starting salaries in the public sector were cut for new workers after the crash.

Potentially more controversially, she said tax systems need to be looked at and some taxes hiked to help redress the generation gap, including includes taxes on wealth, such as property and inheritance taxes. "Wealth taxes are lower today than in 1970. In some countries, more progressive tax systems and wealth taxes (including inheritance taxes) could help fund much-needed social programmes for younger citizens."

Young people, often with big debts, are more vulnerable to financial shocks, she said.

"Let me underline again: this is not about one age group versus another. Building an economy that works for young people creates a stronger foundation for everyone.

"Young people with productive careers can contribute to social safety nets and reducing inequality across generations goes hand-in-hand with creating sustained growth and rebuilding trust within society."

Indo Business

Business Newsletter

Read the leading stories from the world of Business.

Also in Business