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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is the Conservative MP for Tonbridge
For centuries, this country has upheld an unspoken social contract. That each generation will create a better future for the next. That deal is now broken. This is the result of decades of policy choices that have systematically benefited one generation — the baby boomers — initially stimulating the economy but now choking it as wealth is transferred from young to old. Two bad policies in particular have influenced this trajectory. The first was a set of regulatory changes over two decades ago that in effect compelled pension funds to liquidate their investments in domestic UK companies and replace them with government bonds.
That decision destroyed the core social contract that makes pensions work: the idea that the old profit from the energy of the young. Instead of fuelling living minds and ideas, wealth has been channelled into the dead hand of the state through gilts. Today, over 60 per cent of private sector defined benefit pension assets sit in gilts, with just 1 per cent in UK equities. This has starved British enterprise of long-term domestic capital, driving innovative companies like Arm Holdings and DeepMind to seek foreign investment, siphoning the wealth they create overseas.
Second, and even more detrimental to younger generations, is a set of policies that have artificially created a highly damaging cult of housing. For many decades, too few houses have been built in the UK. Thanks in part to the tax system, housing has been transformed from a place to live and raise a family into a de facto tax free retirement fund that excludes the young. More than 56 per cent of the UK’s total housing wealth is owned by those over 60, while home ownership among those under 35 has collapsed to just 6 per cent. This has had profound social and economic consequences as fewer people marry and have children, further impairing long-term demographic regeneration. The result? More than 80 per cent of the growth in real per capita wealth over the past 30 years has come from appreciation of real estate, not from the financial investment that powers the economy.
Michael Tory, co-founder of Ondra Partners, has argued that this capital misallocation has created a self-reinforcing cycle, weakening our national and economic security. Without productive capital, we are wholly dependent on foreign investment and imported labour, straining housing supply and public services. These distortions can only be corrected through a rebalancing of our national capital allocation that puts long-term national interest above narrow electoral calculation. That means levelling the investment playing field to reduce the taxes on those whose long-term savings and investments in Britain’s future actually employ people and generate growth. Along with building more houses and stricter migration controls, this would bring home ownership into reach for younger generations.
Leaving property as the only lifetime capital gains exemption has distorted UK capital allocation. Private residence relief, which exempts primary residences from taxation and was costed by the Treasury at over £30bn in the 2023-24 tax year, should no longer be sacred. Reconsidering PRR would enable the wholesale rebalancing we need, including a lifetime capital gains exemption on investments in UK companies, eliminating stamp duty on share transactions and raising the UK company-supporting Isa contribution limit. This would incentivise British families to invest in businesses rather than buildings.
Finally, the pension system requires fundamental reform. Channelling more of our nation’s savings back into powering UK companies, technology and entrepreneurs would fuel the industrial renaissance our economy requires and generate better long-term returns for pensioners too. Much of this won’t be popular. The current system serves many vested interests. But if we want the economy to grow we can no longer defend frozen assets; the country’s future is on the line.
