Sunak to Scrap Key U.K. Pension Pledge to Help Fix Coffers
Rishi Sunak is set to scrap the so-called triple lock on annual increases to the U.K. state pension as soon as next week, a person familiar with the matter said, in a sign the Chancellor of the Exchequer is seeking to accelerate plans to repair the public finances in the wake of the pandemic.
The U.K.’s finance minister is also preparing to announce plans to fund an overhaul of social care by raising national insurance payments made by some 25 million taxpayers, the Daily Telegraph reported on Friday.
Both commitments are politically fraught, because they would break Conservative promises from their 2019 election manifesto. Prime Minister Boris Johnson went into that vote saying he’d preserve the triple lock and wouldn’t raise income tax, value-added sales tax or national insurance.
But the cost of supporting businesses and workers through the pandemic has forced a rethink. Sunak is grappling with a budget deficit that ballooned to a peacetime high of over 14% of gross domestic product last fiscal year, and has repeatedly warned about his duty to restore balance to the public finances so a future government has room to intervene in any future crisis.
In July, Sunak gave a strong hint of which way he’s leaning on the pensions triple lock, saying his decision would be guided by “fairness both to pensioners and for taxpayers.”
Under the triple lock formula, pensions rise each year by whichever is greatest of three measures: annual growth in average earnings, inflation, or 2.5%. The inclusion of earnings means the government faces an increase in pension costs of potentially 8% or more this year, as people who were furloughed in the pandemic return to work and many lower-earning jobs were lost.
That creates a dilemma for Sunak either he breaks the electoral pledge, or he bakes in the pension rise at a time when he’s trying to rein in spending.
The chancellor is set to announce as soon as Sept. 7 that he’ll suspend the triple lock for this year, removing the earnings component to ensure pension payments rise by either inflation or 2.5%, according to the person, who asked not to be named because the policy is not announced. He’ll also legislate for this year’s change because the triple lock is enshrined in law, the person said.
A second person referred back to the remarks Sunak made about “fairness” and pointed out that because any change requires legislation, it would have to be announced well before the decision on pension payments in November.
“We will continue to support retired people while ensuring future decisions are fair for both pensioners and taxpayers,” the Treasury said in a statement.
The triple lock formula uses earnings data for the three months through July, which the Office for National Statistics is due to publish on Sept. 14. Earnings rose 8.8% in the three months through June. For inflation, data for the year to September is used, which won’t be published until October. It was 2.1% in July.
The government is forecast to spend about 105 billion pounds ($145 billion) on pensions in the current tax year. Each percentage point increase in the state pension lifts annual government spending by about 900 million pounds. So under the triple lock, a repeat of June’s earnings figure in July would mean pensions rising by an additional 6.3 percentage points above the 2.5% floor -- or 5.7 billion pounds a year.
The opposition Liberal Democrat party called the plan an “outrageous betrayal to millions of pensioners.”
Yet while scrapping the triple lock will hit pensioners, any solution the government finds to fund social care could be to their benefit. As well as announcing a funding formula, Johnson is set to promise to cap the amount any person will ever pay in social care costs, according to the Telegraph. It said the cap may fall between 60,000 pounds and 80,000 pounds.
Pressure has been building on Johnson’s government to find a solution to social care funding, after shortfalls in the current system were exposed even further during the pandemic.
Conservative MP and former Health Secretary Jeremy Hunt told BBC radio on Friday the sums needed to fix social care are “eye-watering” and called for a tax increase to pay for it.
The decision has the potential to expose divisions with Sunak’s Treasury. Current Health Secretary Sajid Javid is pushing for a 2% increase to national insurance payments, while Sunak is arguing for a 1% rise, the Times newspaper reported on Friday.
Taking the social care and pensions plans together, “it all points to a government that is worried about the public finances and one that is ready to take action sooner than many investors had anticipated,” said Viraj Patel, global macro strategist at Vanda Research Ltd. “There will be knock-on effects to consumer spending at a time when the economy hasn’t fully recovered to its pre-Covid norm.”
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