IT HAS been six years since the financial crisis began, and the government’s books are still in a mess. As the chancellor prepares his latest Spending Review, public sector borrowing will yet again exceed £100bn this year. And most of that isn’t even cyclical – it is structural. In other words, its annual accounts will still be in the red even when the economy returns to a normal state.
Most of the government’s attempts to reduce the deficit so far have been through taxes, which have increased from £476bn in 2009-10 to a projected £612bn this year. This tightening of the economy’s tax screws has hobbled growth and led to the lacklustre performance we’ve seen recently. But while the sheer size of the tax drain on the economy is certainly formidable, spending will dwarf even this colossal number.
At a projected £720bn this year, the government’s spending plans are too ambitious even now. And the truth is that any long-term plan for a balanced budget must address welfare spending. Crucially, that includes the £90bn we are spending on state pensions. Even after adjusting for inflation, that number is set to jump to over £200bn by 2040, and then to £400bn by 2060.
There are two fundamental steps this government must take if it is to restrain the growth in pensions spending – a key component towards getting to grips with overall spending and the deficit.
First, it should set out a fundamental shift in the long-term purpose of the state pension system towards being a basic safety net. At the same time, it must encourage people to make their own provisions for anything above that level. It has already made some good – but imperfect – progress through the Single Tier state pension. With its introduction, it will make better sense for people to save for their retirement themselves or through automatic enrolment, meaning far more of us will do so purely through inertia, which is better than nothing.
But the government must also abandon the triple lock as soon as possible. With the number of pensioners set to steadily rise ever higher, this policy of increasing pensions at the highest rate of either earnings growth, inflation or 2.5 per cent, will look increasingly unaffordable. In fact, any policy which states that spending must increase either in line with or faster than earnings is, by definition, unsustainable. Sooner or later, it would have to mean all earnings being spent on pensions.
Secondly, the government should acknowledge the new realities of what it means to be over 65 and still working. In terms of well-being, those in their 60s and 70s are fitter, healthier and more active than ever before. And on the other side of the retirement coin, work is safer, more sedentary and less physical than in the past. So while plans to raise the state pension age to 68 by 2046 are a step in the right direction, they should be going further and faster if we're ever going to get the deficit back under control.
Rory Meakin is head of tax policy at the TaxPayers’ Alliance.