Will the Autumn Statement feature another U-turn?
One of the early announcements the government made after coming to office was that in future the state pension would rise in line with whichever was the highest of the inflation rate, the increase in earnings, or 2.5% â€“ the so-called Triple Lock. At the moment, itâ€™s the inflation measure thatâ€™s highest and even using CPI, rather than RPI, that still lands the government with a hefty 5.2% increase. Itâ€™s a lot of new money to find next year when economic growth is slow, fragile and vulnerable to an increasingly stormy global picture.
As should be obvious from a momentâ€™s thought, without some compensating mechanism, the ratchet effect means that the commitment has to impose an ever-greater burden, even leaving aside longer life expectancy and the current deficit: the pension can only ever go up or stay the same, measured against average income.
That fact leaves the Chancellor caught between a fiscal rock and a political hard place. The Treasury could really do without that bill landing on its desk but having set up the mechanism, itâ€™s going to be awfully difficult to U-turn on it.
Those affected vote in big numbers (and vote disproportionately Tory at that), though the Lib Dems â€“ whose policy this originally was â€“ would no doubt be just as loath to be seen to perform another U-turn.
While itâ€™s only the pension which is affected by the Triple Lock, other benefits are also due to rise by inflation, at a time when earnings are falling behind. Thatâ€™s not only expensive for the government but goes against their policy of making work pay. The logic of that points to increasing only by earnings but there is another alternative â€“ to introduce a more sustainable formula which might later be rolled across to pensions. One option would be to take the mid-point between the two highest figures within earnings, inflation and 2.5%.
The Winter of 2011/12 looks highly likely to see massive turbulence in the Eurozone, of a like nature to that which brought about the 2008 Credit Crunch. Even an orderly shaking out of the debt- or deficit-burdened PIIGS group will put banks across the continent and beyond right on the defensive as they work out exposures both to the debt write-offs and on how they stand on Credit Default Swaps and similar financial instruments. That could easily lead to another Crunch and recession. A disorderly break-up would be worse yet.
With that risk looming, it should be no time for the UK government to be taking on unnecessary spending on pensions or benefits. Failing to do so, however, is likely to produce a significant political backlash â€“ not an easy dilemma to resolve.
My prediction is that Osborne will stick to the policy on the pension; the get-out clause in the short term being the scheduled increases in pensionable age. If he does, heâ€™s gambling that the Triple Lock can be sustained until 2015, because as with all U-turns, if it must be done, it is best that it be done quickly.