Rishi Sunak grilled by Neil on state pension increases
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A report from the Office for Budget Responsibility yesterday forecast that the Prime Minister’s “triple-lock” state pensions promise could cost £3billion a year more than previously estimated. The expected rise was based on analysis showing the pension could rocket by up to 8% year if the link with wage growth continued during a predicted spell of pay inflation. Included in the last Tory election manifesto, the triple lock guarantees that the state pension increases in line with inflation, earnings or 2.5% – whichever is higher.
Wage growth has already risen by 5.6% in the three months to April, according to the latest official figures.
The figure is significantly higher than the 4.6% forecast in March by the Office for Budget Responsibility (OBR).
The financial watchdog’s report said earnings growth was “almost certain to rise further” before the next state pension increase is calculated, with many experts predicting wage growth will hit 8%.
“So, if earnings growth in the three months to July period that determines triple lock uprating for next April was 8%, as some expect, that would add around £3 billion a year to spending,” the OBR said.
Asked if the Government was reviewing the triple-lock pledge yesterday, the Prime Minister’s spokesman said: “Our commitment to that still stands.
“More broadly on the OBR report, the risks discussed underlined the importance of returning our public finances to a more sustainable path over the medium term which is why we made the difficult choices at the last Budget and why the Government is committed to fiscal responsibility.”
Separate figures in the OBR report said Chancellor Rishi Sunak could face a £10billion shortfall in the Treasury budget due to the huge costs of the Government’s response to the Covid pandemic.
The OBR said the Government faces “unfunded legacy costs of the pandemic” across areas including health, education and transport over the next three years, which pose a material risk to the public spending outlook.
In its latest fiscal risks report, the OBR said the extra funding pressures for the health service alone could total around £7 billion a year as test and trace and the ongoing vaccination programmes prove costly.
Other spending pressures not yet addressed by the include another £1.25 billion a year for pupils to catch up on education lost during lockdowns, as well as around an extra £2 billion a year to fill the fares gap left by fewer passengers using public transport.
The spending alert came as the OBR warned that Britain faces three large and “potentially catastrophic” risks from the pandemic, climate change and a ballooning debt mountain.
It said the UK faces the triple threats as it emerges from the “largest peacetime economic and fiscal shock in three centuries”.
While the OBR did not update its economic or borrowing forecasts in the report, it said the economy had proved “surprisingly adaptable and resilient” to the pandemic.
Having plunged by 10% in 2020 – one of the deepest recessions of the advanced economies – it has since begun recovering at a blistering pace, helped by nearly £400 billion of Government support and measures.
The OBR expected the UK economy to recover to pre-pandemic levels by the middle of next year – just over two years after the crisis struck, compared with the four-and-a-half years it took to rebound following the financial crisis.
But it reiterated that the economy is likely to suffer a 3% permanent hit from the pandemic and said the current rebound is unlikely to be maintained at the rate.
OBR member and former Bank of England deputy governor Sir Charlie Bean said: “We expect the economy to moderate from here and that we won’t see the rapid growth rates we have seen in the past as the regulations were relaxed being repeated in the future.”
The OBR cautioned that rising inflation and potential interest rate hikes could put the UK’s debt mountain – standing at more than £2 trillion – under yet more pressure.
It said it was not yet clear if the current soaring levels of inflation would be temporary, as the Bank of England expects, or whether there are more persistent underlying cost pressures that could prompt interest rates to rise.
Inflation and rising wage costs could also see the Government face a £3 billion bill from its so-called triple lock state pension pledge, the OBR calculated.
Turning to climate change, the watchdog cautioned that delayed action could lead to a 3% additional impact on gross domestic product (GDP) and debt would be 23% of GDP higher than if early action is taken by 2050-51.
But the OBR said its baseline scenario of early action to achieve net zero would see the impact on the UK’s debt mountain be less severe than that of the coronavirus crisis, adding 21% – or £469 billion – of GDP to net debt by 2050-51.
In a stark warning over the fiscal threat posed by climate change, it said if there was no action at all to reduce emissions, UK debt would rocket to reach 289% of GDP by the end of the century.
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