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Fiscal Outlook

It is a privilege to take part in this debate. I enjoyed the typically powerful speech from the noble Lord, Lord Bridges of Headley. What I think he got right was his comment that this debate is really about political choices and political beliefs. It will come as no surprise to him that, on this side of the House, we have different beliefs leading to different choices; that is as it should be. I will speak about the triple lock, which on the OBR’s figures is a key element in determining the UK’s fiscal outlook.

I support my party’s commitment to the triple lock up to the next election. The inevitable question is: what follows? A number of noble Lords have mentioned

the triple lock, and it was raised several times in last week’s parallel debate. I will not mention them all, but it is clearly a big issue. A number of people simply say that we need to abolish it. I am sorry, but this is facile—that is only a part of the equation, because you also have to say what should replace it. Crucially, we must also discuss the right level of the state pension, because the debate about the triple lock is as much about this as the technical details of the revaluation basis. In my view, these are jobs for the Pensions Commission, and I hope that it will address them in its report early next year.

I favour the triple lock because it is highly effective at protecting pensioners, particularly those on low incomes. I take it people understand the triple lock, but what is often missed is that it does not apply to the whole of the state pension. It applies only to the new state pension and the basic pension. The rest of the state pension is tied to the CPI. It does not, of course, apply to all the other sources of income received by pensioners. The net result for most pensioners is that incomes during receipt, as they get older, do not increase faster than those of the working population. There seems to be an implication that pensions are going up faster because of the triple lock. This is only part of the equation, and most pensioners experience a decline in their income during their retirement. The only people for whom it actually leads to a protection—even an increase, in some cases—are the poorest pensioners. This is because, by definition, their only income is the new state pension or the basic state pension.

Any system of pension uprating serves three distinct objectives, hence the triple lock. First, it allows pensioners to share in rising living standards, which I hope we would all support. Secondly, it protects pensioners against inflation. Last but not least, it protects the Government against difficult political circumstances.

The first two objectives could be achieved through linking pensions solely to earnings or prices. The triple lock, of course, goes further by guaranteeing the most favourable outcome each year. That reduces political risk but increases long-term costs through the ratchet effect. As I have explained, the core argument in favour of the triple lock is that it disproportionately benefits poorer pensioners. It is targeted and then recouped from better-off pensioners through them paying taxation like everyone else. For many low-income retirees, the state pension and related benefits make up the majority of their household income, and a significant minority have no income beyond their state support. It is these people that the triple lock benefits.

The 2.5% minimum increase has raised the most questions. This floor was introduced partly in response to the politically controversial 75p weekly rise in the basic state pension in 2000, which complied with the rules at the time but was widely regarded as inadequate. It still ensures that pensioners receive a meaningful increase even during periods of low inflation and weak wage growth.

The policy has helped bring the state pension close to the level anticipated by the 2005 Pensions Commission, which envisaged it being around 30% of median earnings—the sort of level it is at the moment. Coming

back to the focus of this debate, clearly the triple lock’s most significant drawback is that it comes with a fiscal cost. It has increased pension spending more rapidly than was envisaged when it was introduced, particularly because the 2.5% floor has been higher than earnings growth over a number of years. Critics argue that pensioners as a group are now relatively better off, but that is not true of all pensioners: as I explained, there are large numbers of pensioners on low incomes. I agree with my noble friend Lady Alexander of Cleveden that we need a reassessment of the triple lock. What are we going to do after the next election? However, as part of that, we have to recognise the value that it brings to the poorest pensioners.

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