Boris Johnson’s Covid Recovery Plan Is Spend, Spend, Spend

As the drama around former Health Secretary Matt Hancock moves to the background, a moment of truth is coming for Boris Johnson. This time, it’s all about spending.

The prime minister’s inclination is to spend his way out of the pandemic-induced crisis, but Chancellor of the Exchequer Rishi Sunak is increasingly anxious to see fiscal guardrails imposed. How this tension gets resolved will define Johnson’s legacy as much as Brexit and probably determine the timing of the next general election.

One major area where the debate over spending is playing out is pensions. The government is under pressure from fiscal conservatives to abandon the so-called “triple lock” on the basic state pension. That policy, which has been in place since 2010, promises that pensions will increase in line with either inflation, the rise in average earnings or 2.5% — whichever of those three is highest.

Critics argue that the triple lock is unaffordable, ties the Treasury’s hands when it needs to fund other priorities and exacerbates intergenerational inequities. Johnson, however, wants to uphold a commitment from his election manifesto to keep it. He’s also worried about the political fallout from abandoning a long-standing Tory policy that benefits a key voter group. The triple-lock pledge has endeared the party to pensioners, who tend to vote Conservative and actually turn out on polling day.

Johnson’s predecessor, Theresa May, had already threatened that love affair. She toyed with ditching the triple lock and then announced changes imposing more burdens on those funding social care for the elderly. Her 2017 plan was quickly shelved after a backlash, but the misjudgment suppressed and divided the older vote, contributing to her loss of a parliamentary majority. Johnson, whose political instincts are rarely wrong, is wary of making a similar error.

The problem today is that the pandemic recovery has meant a sharp increase in earnings, up 5.6% in the past three months and expected to rise further, potentially costing the Treasury an additional 4 billion pounds ($5.5 billion) in pension payments.

Boris Johnson’s Covid Recovery Plan Is Spend, Spend, Spend

This increase is obviously an anomaly — due to a combination of base effects (wages recovering to pre-pandemic levels after being depressed by furlough) and composition effects (job losses over the past year disproportionately affected lower wage workers), rather than workers suddenly getting big wage hikes. But it’s going to substantially add to government costs at a time when there are other pressing demands on the budget.

Although the elderly certainly suffered during the pandemic, it’s hard to defend such a big increase for those who have been most likely to benefit from rising property and equity prices and whose pensions have risen well ahead of earnings. As Tory MP Steve Baker has argued, something is wrong when job losses among young workers lead to a windfall for relatively wealthy pensioners. It’s not a good look for a party trying to attract more youthful voters.

And yet U.K. pensions aren’t generous by international standards. Today a pensioner (the current pension age is 66 but scheduled to rise) could receive up to 180 pounds per week, compared to the equivalent 212 pounds in Ireland, 254 pounds in the Netherlands and 366 pounds in Denmark, though workers in those countries need to put in more years to qualify. For the average earner, the U.K.’s net replacement rate (the share of last earnings that are covered by pensions) is only 28.4% from mandatory pensions — well below the OECD average of 58.6%.

Boris Johnson’s Covid Recovery Plan Is Spend, Spend, Spend

Even when you add in workplace savings schemes — the U.K.’s strong point is in private pensions — the country’s replacement rate rises to 61%, still lower than both the OECD and EU averages when voluntary pensions are added in. 

Still, if ever there was a reason to revisit the triple lock, it’s now. Not only is the design flawed (as today’s situation shows) but its costs are unsustainable over time. With the U.K.’s graying population and low productivity growth, it makes no sense to have a state pension that ratchets ever higher, regardless of what’s happening to the economy or other income. And with many businesses still struggling (an effect compounded for some by Brexit), the Treasury is having to do more with a shrunken tax base.

The solution isn’t to ditch the formula entirely. The state pension is an important hedge against the vagaries of the market and is deeply engrained in public expectations. But that social contract only works if today’s young will also benefit. At the current rate, they may not. 

In 2015, the Institute for Fiscal Studies proposed a “smoothed earnings lock” that would link state pensions to a fixed proportion of average earnings, which is done in Australia. Something of the sort — which would protect pensions from being eroded but also ensure they don’t rise continually higher relative to earnings — is worth revisiting, as indeed a parliamentary committee has urged.

Applying the current budgetary approach of shaving expenditure here and there (look at foreign aid and catch-up funding for schools) to the pensions issue won’t address the bigger problem of how to fund the recovery and Johnson’s other spending pledges. The prime minister must also find money to fund the transition to net zero, a plan for which is due to be published before the COP26 summit this year. And although new Health Secretary Sajid Javid may have been a fiscal conservative when he was chancellor, expect him to advocate hard for spending on much-needed social care reform and health sector priorities ahead of winter.

Britain can (and will) still borrow to fund Tory pledges, of course, though public debt as a percentage of GDP is now the highest it’s been since the 1960s. You can be sure Sunak has his eye on the inflation figure and is wary of losing the confidence of markets.

The chancellor is also hemmed in by a triple-lock of his own — a promise that headline taxes (on income, VAT and national insurance) won’t be increased. With Britain’s tax burden heading toward 35% of GDP, the highest it has been for half a century, the Tories certainly don’t want to head into a new election with that pledge broken.

The only real solution for funding the U.K. recovery is both obvious and elusive: increase productivity and long-term growth. Programs that improve infrastructure and provide skills training (especially those that help older workers remain employable for longer) should help unlock some productivity gains. But this kind of spending can lead to waste if mismanaged — and the current government doesn’t inspire confidence on that front. 

With a spending review due, Sunak will want to show he can apply the breaks, and the costly pensions triple-lock is the obvious place to make a stand. That may quiet the Tory back benches calling for more fiscal prudence. But if Johnson is to justify the adjustment to older voters, he should also announce a reform that fixes the social-care system.

Meanwhile, the costs of the recovery will continue to grow. Johnson can only hope all the spending pays off — in terms of growth and perhaps a re-election — before the bills come due.  

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Therese Raphael is a columnist for Bloomberg Opinion. She was editorial page editor of the Wall Street Journal Europe.

©2021 Bloomberg L.P.

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