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Chancellor Philip Hammond needs to act now to stop the generation gap widening further.
Chancellor Philip Hammond needs to act now to stop the generation gap widening further. Photograph: Xinhua / Barcroft Images
Chancellor Philip Hammond needs to act now to stop the generation gap widening further. Photograph: Xinhua / Barcroft Images

Hammond should use an interest rate rise to unpick triple lock on pensions

This article is more than 6 years old
The chancellor must act in the name of fairness to younger people, and the budget would be the perfect moment to do so

As Philip Hammond prepares to defend his £12bn of welfare cuts in his autumn budget, pensioners can consider themselves lucky to be financially insulated.

While most people on low and middle incomes are finding their spending power squeezed by rising inflation and cuts to in-work benefits, the triple lock on pensions is safe.

This was made clear by the chancellor after the Organisation for Economic Co-operation and Development (OECD) joined the long queue of thinktanks from left, right and centre, arguing that pensioners need to share the burden of austerity.

The triple lock, which guarantees a 2.5% increase in the state pension or a rise linked to inflation or earnings, whichever is the higher, has done much to improve the lot of pensioners. It was a Liberal Democrat promise in 2010 that the Tory leadership of the coalition government adopted.

By contrast, Labour’s pension increases in the early part of the century focused on raising the incomes of the poorest with a means-tested pension credit.

The OECD said last week in its annual health check on the UK that, since the triple lock was put in place, workers had made the largest contribution to reducing the government deficit, “whereas older individuals have been relatively unaffected”.

The September inflation and earnings figures are used as the basis for calculating next April’s pensions increase. Inflation was 3% and earnings 2.2%. No wonder the OECD said that it would be fairer to tie future increases to earnings.

The Centre for Policy Studies (CPS), the thinktank that can claim to be one of the hothouses for developing Thatcherite policies in the 1980s, argues that welfare spending has become dramatically skewed in favour of the retired, pushing up their incomes by 10% in real terms, while benefits are down by around 5% for people of working age. Had state pension rises only sought to protect retirees from inflation since 2010, setting aside the link to earnings and 2.5%, the Treasury would now be £8.6bn a year better off, which might have paid for a two percentage point cut in income tax or increased spending in areas of greater need, it says.

The CPS analysis illustrates how a promise that appears to cost little can become a weight, slowing the ship of state. When it was first agreed, George Osborne’s former Treasury adviser, Rupert Harrison, says it was a budget item costing £50m a year.

Hammond is sympathetic to the campaign for a breather in pushing up the incomes of the better off. But he has ruled out any change for fear of endangering his already precarious political position. Yet his budget on 22 November could prove to be the perfect moment to stop funnelling ever more funds into pensions, should the Bank of England raise interest rates for the first time in a decade.

This is the moment many older savers have been waiting for – when the pendulum swings away from cheap credit to providing a higher return on savings. The increase from 0.25% to 0.5% only restores an emergency cut made by Threadneedle Street in the wake of a Brexit-induced panic last August. In practice, it is unlikely to herald a rush back to even modest interest rate levels of 1% or 2%.

However, the signal will be unmistakable, and the banks will begin to price their products accordingly. In fact, they already have. Mortgage lenders have increased their fixed rates for two and three years in anticipation of an increase in the base rate.

Higher savings rates will no doubt follow in due course, providing the chancellor with a cheery backdrop – at least from the perspective of those who are retired – of stronger returns on savings. He can use this to pare back future pension benefits and redirect them to the working poor.

In the name of fairness, the government cannot keep hammering the young to protect the old. It must shift its position before the generational divide widens further.

Goldman plays the Brexit game

Goldman Sachs boss Lloyd Blankfein gave London mayor Sadiq Khan and City minister Stephen Barclay the equivalent of a cold shower last week when he tweeted: “Just left Frankfurt. Great meetings, great weather, really enjoyed it. Good, because I’ll be spending a lot more time there. #Brexit”.

The Treasury and Khan, not to mention the lord mayor of London, Andrew Parmley, are desperate to stop major banks, insurers, accountancy and law firms from decamping to Germany’s financial centre following Brexit.

Plans for a soft Brexit – one that provides the banks with most of their demands – appear to have disappeared in a blizzard of claim and counter-claim as the EU and UK’s respective negotiating teams lock horns. A hard Brexit beckons. It means that agreeing the legal framework for trading between the EU and a newly independent Britain is fraught with difficulties arising from the rivalries with financial centres inside the EU and the limited time left to secure a deal.

Financial industry lobby group TheCityUK says that most of its members will need to begin putting their contingency plans for a hard Brexit into action by April next year at the latest. It fears the loss of 75,000 jobs, £38bn in revenues and £10bn in tax should Britain exit without a deal.

Theresa May’s pleading in Brussels last week could arrest the situation, especially after she appeared to illicit some favourable remarks from Angela Merkel, who said trade talks might begin in December. Yet the City knows the Brexit debate is not confined to May and Merkel or Brexit secretary David Davis and the EU’s chief negotiator, Michel Barnier. The Tory party has a stake in the outcome, meaning anything could happen, including a hard Brexit.

So are financial firms bluffing if they threaten to quit when the Brexit flag goes up? Yes, but only because it takes time to move people with expensive demands from one place to another, set them up in swanky offices and find them homes and schools for their children. In the end, the very real risk is that London’s financial sector and the exchequer will be much diminished.

Highly charged warning for power firms

Change is coming whether you like it or not, UK energy regulator Ofgem told energy firms ​last week.

While Dermot Nolan’s speech was partly about laying down the law to companies who have grumbled against the price caps he will impose, it was also about making it clear there are ​other ​big structural changes afoot, irrespective of ​these measures.

In the future, householders might get their power from electric carmakers or tech firms selling smart gadgets, Nolan said. Or maybe they would get it from their local solar farm, making traditional suppliers less relevant or even redundant.

While British Gas is the biggest energy company today, the market leader in a decade’s time could be plausibly be an Amazon or an Alphabet-owned Nest.

In the meantime, there’s the small matter of price caps to implement. Nolan’s message to companies who oppose caps was clear: stop moaning, embrace it.

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