UK Chancellor Jeremy Hunt is facing a £2 billion ($2.5 billion) bill to cover a larger-than-expected increase in the state pension after official pay data showed the uprating next year is likely to be around 8.5%.
(Bloomberg) — UK Chancellor Jeremy Hunt is facing a £2 billion ($2.5 billion) bill to cover a larger-than-expected increase in the state pension after official pay data showed the uprating next year is likely to be around 8.5%.
Under legislation, the state pension rises every April by average earnings for the preceding three months to July, September’s inflation rate or 2.5%, whichever is highest.
Earnings data from the Office for National Statistics published Tuesday showed wage growth unexpectedly accelerated to 8.5%, potentially taking the total annual bill for the state pension close to £140 billion for the UK’s 12 million pensioners.
The Institute for Fiscal Studies said the uprating was larger than expected and will add £2 billion to spending compared with the March budget forecast, making it harder for the chancellor to find savings for any giveaways in his autumn economic statement in November.
In March, the government’s fiscal forecaster expected the state pension to rise by about 6%. Wages rather than inflation are expected to determine the increase, with the Bank of England predicting prices will be rising by less than 7% in September.
Hunt is under pressure from MPs to deliver tax cuts ahead of an election expected next year but he told Bloomberg TV this week that he is “unlikely” to have any money to spend at the autumn statement because inflation has been “stickier and debt interest payments higher.”
He had just £6.5 billion of headroom against his fiscal rules in March, the smallest margin on record, and is expected to use any savings he can find to freeze fuel duties in a move that would cost about £4 billion.
Welfare Costs
An 8.5% uprating would see the annual state pension rise from £10,600 this year to £11,501 next year, Interactive Investor calculated. The ONS said the July earnings number could be revised in October, which will be the final estimate used.
The chancellor is scouring the £100 billion working-age welfare budget for savings, but Bloomberg has learned early discussions have been held over whether to tinker with the pensions triple lock as well.
Prime Minister Rishi Sunak has refused to recommit to the pledge if the Conservatives stay in power. William Hague, the former Tory leader, has said that the triple lock needs to scrapped because it is unaffordable and unfair to younger generations.
Jonathan Cribb, associate director at the IFS, said: “Since its introduction in 2010, the triple lock, together with the introduction of the new state pension, has significantly increased the generosity of the state pension relative to earnings. But this comes at a cost to public finances – the triple lock has added £11 billion to spending on the state pension in 2023–24 relative to price or earnings indexation.”
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