The Chancellor’s hopes for a tax cut before the election are dashed by record wage growth
For Jeremy Hunt fixing Britain’s financial situation has become a game called whack-a mole: as soon as one problem is solved, another appears.
‘s stubbornly high inflation has finally eased and wages have now grown at a record rate. Triple lock on pensions threatens to create a hole in the already well-balanced budget of the Chancellor.
The government has committed to increasing the state pension in April each year by the highest of the three factors: inflation, wage increases or the 2.5pc baseline.
In April 2023, the state pensions increased by 10.1pc to match inflation.
In March, the Office for Budget Responsibility predicted that the triple-lock would lead to a rise in wages of 6.2pc. The Office for Budget Responsibility (OBR) did not specify the measure on which this forecast was made, but its predictions for wage growth were higher than those for inflation.
With average wage increases now at 8pc it appears that wages will be the deciding factor for triple locking this year. The Chancellor will have to find billions of pounds more than he had predicted just a few months ago.
Steve Webb, former David Cameron pensions minister, says that the government will have to spend about £2bn (£2bn) more than it planned in March. “It’s amazing how fast things have changed,” says Steve Webb, former pensions minister under David Cameron.
The September wage data will be calculated using an average of the monthly figures for May through July. In May, wages rose 8.2pc and in June by 8.5pc.
Capital Economics predicts 8.4pc for the crucial triple-lock measure.
The state pension will rise to more than £11,600 next spring, compared to its current level.
An increase in the state pension that is higher than expected would put even more pressure on the already stretched public finances.
Hunt only has £6.5bn left to meet his targets, the smallest headroom for a chancellor at least since 2010.
Carl Emmerson is the deputy director at the Institute for Fiscal Studies. He says Hunt had so little margin for error, he was “right up to the ceiling” before the latest figures were released.
Emmerson: “He’s in trouble already, because it appears that the debt interest will cost him more in the future than what was anticipated in March due to higher gilt rates and interest rate than expected.”
Inadvertently, a strong wage growth could increase the government’s borrowing costs.
Bank of England is concerned about the possibility of a spiraling wage-price system. Tuesday’s numbers prompted traders, who had previously bet on interest rates reaching 6% instead of 5.75pc to increase their stakes. The Government would have to pay more money if they wanted to borrow.
The prospect of tax cuts before the election is even more out of reach.
Hunt is being pressed by his own party to make headline-grabbing announcements in order to win over voters who are resentful of rising mortgage costs and food prices.
According to YouGov, the Conservative Party currently has a polling margin of 22 percentage points less than Labour. Tax giveaways, which have been promised for years, are seen as essential to turn the tide.
Philip Shaw, an analyst at Investec, says that history shows that Chancellors have always managed to find “enough change” in the back of their sofa to reduce taxes before an election without exceeding their targets.
Hunt could theoretically pause triple locking for an extra year, just as the Tory Party had done during the pandemic. The Government then ignored the surging wage data, claiming it was an aberration.
The political implications of removing the triple lock would be grave.
Webb says, “You wouldn’t want to break your promise twice in three years by increasing the price of the last item before an election.”
“For the April 2020 increase, they broke through the triple lock, and said, “Oh, well, it’s because Covid, and everything was very unusual.” Doing it twice in three year would really undermine your credibility.”
The Government will also find it difficult to claim that the wage growth has been an aberration, given the continued strong growth in wages since the end the pandemic.
Hunt seems to be looking at other options. The Sunday Times reported that John Glen, chief secretary of the Treasury, had held discussions with Mel Stride, Work and Pensions Minister, about cutting billions out of the welfare budget. This could give the Chancellor some more flexibility.
Capital Economics’ Ruth Gregory who worked previously for the fiscal watchdog, the OBR, states: “With the upward impact of higher interest rates on borrowing and the weaker GDP still to come, any pre-election package of net tax reductions will probably need be modest or quickly reversed.”
Shaw also says that the outlook of public finances is likely to only allow Hunt a few “very marginal” giveaways.
Other financial pressures are increasing. The government has built its budget around the assumption that will increase fuel duties in March next year after they were frozen since 2011. This would be a politically toxic move and seems unlikely.
The Chancellor also stated that he wanted to make permanent an expensive investment tax break for business, a policy which would also require financing.
Emmerson: “It is questionable if he sticks to the Public Service budget plans that he has pencilled in. Because to stick to these spending plans, some departments would have to suffer further cuts.”
Hunt has already altered the fiscal rules in order to give him more flexibility. Hunt has given himself an extra five years to reduce the debt-to GDP ratio.
The increase in state pensions will have a negative impact on tax revenues. The freezing of tax thresholds will result in more people paying higher rates.
Emmerson, however, says that the triple lock is becoming increasingly unsustainable.
“In the end, public finances will be in a poor state. We’ll need to take action against this indexation.” I don’t believe that the increase next year is the real problem. Emmerson believes that the problem is more long-term.