Labour should ditch the triple-lock pensions promise to help tackle the UK’s straitened public finances, the Organisation for Economic Cooperation and Development has urged.
In its latest survey of the UK economy, the Paris-based club of industrialised nations added its voice to those calling for an end to the pledge, which uprates the state pension each year by whichever is the highest of wage growth, inflation or 2.5%.
In a special chapter on pensions policy, the OECD’s experts say the triple lock “puts upward pressure on public expenditure and adds significant fiscal risks by exposing public finances to supply shocks, thus requiring a timely reform” – though it warns that public support would have to be built for any change.
Speaking at the launch of the report on Wednesday, Torsten Bell, the pensions minister, left room for Labour to ditch the policy but only after the next general election. “The government’s manifesto commitment is to the triple lock throughout this parliament,” he said. “That is going to happen.”
As Rachel Reeves prepares to leave the Treasury after two years as chancellor, the OECD was broadly positive about her record, saying Labour’s pro-growth agenda “provides a strong basis for a gradual recovery”.
Launched at a press conference in London on Wednesday, the assessment came after Reeves used her final Mansion House speech in the City to defend the decisions she has made, saying she had “proven the doubters wrong”.
But its 140-page assessment repeatedly returns to the need to repair the public finances in the years ahead.
“Modest growth, high public debt, high interest payments and increasing spending pressures from ageing, climate and defence are limiting fiscal space,” it says, adding that the plans pencilled in by Reeves at last year’s spending review “leave limited room for manoeuvre”.
Thinktanks including the Resolution Foundation and the Institute for Fiscal Studies have called for reforming the triple lock, which was introduced by the Conservative-Lib Dem coalition in 2010.
The independent Office for Budget Responsibility has also highlighted the triple lock as a risk to long-term fiscal sustainability, pointing out that it has cost three times as much as anticipated when introduced.
The OECD suggests the annual increase should instead be an average of earnings and inflation – an approach that it estimates could make savings worth 2% of GDP in the long term.
Other money-saving measures it recommends include a drive to improve the productivity of hospitals, with spending on this crucial part of the NHS high by international standards.
“There may be scope to improve the efficiency of hospital operations,” the report says. “Operational improvements could include better coordination of patient discharges, at the right time to the right location, especially as capacity is constrained in out-of-hospital care.”
With a new chancellor expected to be in post next week as Andy Burnham takes over as prime minister, the survey also cautioned against raising tax rates.
“Tax reforms should prioritise strengthening efficiency and revenues rather than raising headline rates. The tax burden is already high, while the system remains complex and distortionary,” it said. However, it suggested that increasing VAT could be used to raise revenue quickly if the government finances worsened significantly.
Bell dismissed the idea, but argued that tax increases under Labour were helping to fix public services and invest in infrastructure, which would be positive for the economy over the long term.
“Now is not a good time to raise VAT, as we’ve just been through a cost of living crisis and the Bank of England is trying to return inflation sustainability to target,” he said. “The people who think that a collapsing NHS – which is what we inherited – is good for growth haven’t met companies that aren’t seeing their workers turn up because they’re stuck on NHS waiting lists. And that’s what we inherited. And so making sure we rescue our public services is the pro-growth choice.”
