Chancellor Rishi Sunak will have to stump up £4bn on pensioners from next year to cover the Conservative Party’s ‘triple lock’ pledge, despite efforts to cut back spending after the pandemic.
The headline growth rate of average UK earnings rose to 5.6 per cent in April — an artificial inflation caused by last year’s furlough scheme and job losses.
Economists expect it to rise to around eight per cent by July, but say the true rate of growth is much lower.
This means Sunak will have to hike pensions by the headline rate if he is going to stick to the Tories’ triple-lock promise, which ensures state pensions rise highest out of average earnings growth, inflation or 2.5 per cent.
The Treasury appeared to accept the difficulty of its position, telling the Financial Times its focus was to “ensure fairness for both pensioners and taxpayers”.
It said Therese Coffey, secretary of state for work and pensions, would decide the new rate of state pensions in her annual review this year, but the final decision will be made by Sunak and Prime Minister Boris Johnson.
Pensioners received the default 2.5 per cent increase this April, but pay rates have been skewed by comparisons with last year when millions of people were on 80 per cent of their wage due to the furlough scheme.
The level of average earnings has also been inflated because most jobs lost during the pandemic were in low-paid sectors.
Forecasts from the The National Institute of Economic and Social Research suggest the government may need to spend up to an extra £4bn per year to keep pensioners’ living standards in line with those of working adults.
But the Treasury faces a tough political choice on pensions following its decision to allocate £1.4bn to schools catch-up funding — less than a tenth of the amount recommended by the government’s top adviser.