Rupert Harrison, Senior Adviser, PIMCO, UK Portfolio Management Team
The pensions triple lock is the biggest sacred cow in UK politics, a point that will not have been lost on Prime Minister Andy Burnham when he announced his intention to end the policy at the recent Labour party conference. His decision, the way he plans to spend any savings, and the responses of the other political parties have taught us a lot about the fiscal vulnerabilities of our political system.
But first, a personal story – one that I've never written down before. I was in the room when the triple lock was first agreed in May 2010.
As a junior member of the five-person Conservative team in the coalition negotiations with the Liberal Democrats, I was tasked with crafting a coherent economic strategy from the two parties' manifestos. It was the last day of the negotiations, and we were expecting Gordon Brown to go to Buckingham Palace to resign as prime minister at any moment, so the time pressure around the table in the Cabinet Office was intense.
The Lib Dems were pushing for the triple lock – one of their manifesto policies – to be included. Each party had a dedicated civil service point person, so we asked ours to get a costing from the Treasury. After half an hour he returned with a number: it would cost £50 million. That's not a typo.
Looking back, the actual calculation was probably zero. There were no years in the forecast when average earnings growth was expected to be below either inflation or 2.5%, meaning the triple lock wouldn't cost anything over and above the existing policy of earnings indexation. The Treasury officials may have felt they couldn't come back with zero, so they picked £50 million as a suitably small number.
The estimate would prove to be off by a factor of 300 and rising.
That same difficulty of predicting how much the triple lock will cost, and therefore how much abolishing it could save, applies to Burnham's announcement. The government says the new proposal – essentially long-term earnings indexation with temporary inflation protection – will save £15 billion by 2040, but the Institute for Fiscal Studies estimates it could be anywhere between £4 billion and £20 billion. Or even zero if earnings growth is consistently strong.
Any fiscal credibility the government could have earned with gilt investors has therefore been undone by the commitment to spend as much as £18 billion on a new National Care Service.
The responses of the other political parties have also been instructive. The Lib Dems are sticking with the triple lock, unsurprisingly given it was originally their idea. Reform has been attempting to earn back some fiscal credibility under new Shadow Chancellor Robert Jenrick, but the party was very quick out of the traps in pledging to oppose any change.
The Conservatives' response is perhaps the most telling. They have gone the furthest in trying to claim the mantle of fiscal responsibility, with an eye to repairing the damage done to their reputation following the mini-budget of the then-prime minister Liz Truss in 2022. Initially, they attempted to sit on the fence. Remember that the 2017 Conservative manifesto actually pledged to replace the triple lock with a double lock, scrapping the 2.5% minimum floor. But in the end it seems they couldn't resist the pressure from the right of the party and leader Kemi Badenoch recommitted to the triple lock.
It will be interesting to see how public opinion evolves in response to the prime minister's announcement. Initial polling suggests more support than opposition. The issue will resurface because the government says it will legislate for the change in this Parliament. If it passes, that could conceivably give the other parties another chance to change their positions – after all, pledging to actually legislate to bring the triple lock back is different from opposing its abolition. But given the above dynamics, there is little sign that such a shift is on the cards.
So what's the bottom line? The lesson is that this new era of fragmented politics makes it even harder to take and stick to difficult decisions that save money. As we've said before, on paper the UK deficit reduction plan looks reasonable – the risks are about slippage. With pressures building ahead of the Budget and even more so into next year's spending review, markets may start to focus more on those risks.
In our first edition of the Gilt Edge, we warned that next year's spending review could prove a bigger fiscal challenge than the upcoming Budget. Now, reports suggested the government may delay the review until the autumn to make room for another tax-raising Budget and a larger spending envelope. Gilt Edge readers won't be surprised.
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