The state pension triple lock could be at risk (Image: Getty)
A fresh warning has been issued over the UK’s financial prospects by the Office for Budget Responsibility, including a huge projected increase on health and pensions spending.
The OBR has today released a new report, Fiscal Risks and Sustainability, in which it warned that the UK is currently heading for an ‘unsustainable path’ thanks to pressures on spending including the state pension triple lock and warned that debt will “grow explosively” without intervention.
The increasingly controversial fiscal mechanism was introduced by the Conservative-Lib Dem coalition government in 2011. The lock guarantees that state pension payments must be increased each year by one of three metrics – wage growth, inflation, or a flat 2.5%, whichever is highest.
It has meant that in recent years, state pensions have increased faster than inflation, with a 4.8% increase this year which started in April handing another £575 a year to new state pensioners with a full National Insurance record.
Today, the OBR set out an assessment of the UK’s ‘fiscal sustainability’ through analysis of various possible scenarios for the country’s finances.
In it, it says that assuming the triple lock is unchanged, spending will increase by 9% of GDP in the next 50 years.
The report outlines: ““In our baseline scenario, based on the assumption of unchanged policy, total primary spending is projected to rise by around 9 per cent of GDP, from 40 per cent of GDP in 2030-31, the end of our medium-term forecast, to 49 per cent of GDP by 2075-76.”
Among reasons for the increase, including a projected 8% increase in health spending, the triple lock is a large contributory factor, the OBR says.
The report adds: “State pension spending, which is projected to rise from 5 per cent to 9 per cent of GDP over the projection period. This is driven by population ageing and the cost of the triple lock. The triple lock is estimated to account for around a third of this rise by the end of the projection period.”
It continues: “In the baseline scenario, the triple lock drives 1.2 per cent of GDP out of the overall 3.6 per cent of GDP long-term increase in state pension spending. Analysis in the 2025 FRS showed that this is highly sensitive to assumptions about the future volatility and level of inflation and earnings growth.
“In that report we included a scenario which showed that if earnings growth and inflation were to be more volatile, then state pension spending would be 1.5 per cent of GDP higher than our stated baseline scenario.”
However, if the triple lock were to be ditched and replaced with an average earnings system instead, it would cost the state significantly less.
The report says: “If the state pension were to be uprated by average earnings, spending would be reduced by 1.8 per cent of GDP compared to baseline by the end of the projection period, while uprating by CPI inflation is projected to reduce it by 5.4 per cent of GDP compared to the baseline. “
The OBR says that the UK is in a “challenging position” and warned that the UKs government debt has increased faster than most advanced economies.
It said: “The UK’s public finances are currently in a challenging position relative to history and to other similar countries, with government debt having increased by one of the largest shares of GDP of any advanced economy over the past two decades. And there are many sources of risk to the short- and medium-term outlook for the public finances, most obviously at present from the impact of the conflict in the Middle East. It is important that these medium-term risks and challenges are also seen in the light of an assessment of longer-term fiscal sustainability.
“This is because, while the analysis in this report focuses on difficult fiscal outcomes that could emerge some years down the road, a key finding is that early action to head these off is much less costly than late action.”
The report added: “We stress that it is not plausible that the UK, or any other country, could remain on any of the unsustainable paths set out in these scenarios, because they imply that debt will ultimately grow explosively.
“It is almost certain that future governments would have to take action before this happens to adjust the fiscal stance to keep debt at sustainable levels. The scenarios should not be seen as forecasts of the evolution of debt far into the future, but rather as an illustration of the long-term pressures on the public finances and of the scale of changes in tax or spending policy that would need to be made at some point to maintain fiscal sustainability.”
The Labour government has committed to keeping the triple lock for at least the rest of its current Parliamentary term.
The man widely expected to take up the mantle of Prime Minister later this month, Andy Burnham MP, has also pledged to keep the lock in place.
Reddit user Masam10 asked in an online Q and A: “Is it time to abolish the triple lock? Or at least have that discussion?”
The Makerfield MP replied: “I appreciate there’s a lot of debate about this but it is important that the commitment in the manifesto stands.”