Slow growth in recent years has resulted in a mismatch between pension value and the wages of the average worker. Between April 2010 and April 2016, the state pension value increased by 22.2%, whereas earnings grew only 7.6% and prices 12.3%. As a result, pensioners’ incomes have risen at nearly double the rate of workers.

Every year a debate reemerges about whether to change the triple lock because the current arrangement does not look financially sustainable. It is a tricky subject for the Conservatives whose supporter base skews older than Labour. By changing their pension policy they risk the ire of voters, but they also strive to be economically efficient. Any alteration would go against their manifesto where they pledged to maintain the current formula.

It was reported last week that treasury officials were discussing a one-off pause of the triple lock, with the goal of saving £1bn. Facing an 8.5% rise, Jeremy Hunt and his team are weighing up whether to adopt an earnings link that tracks the underlying level of pay growth. This could bring in a lower (though admittedly still high) rate of increase of 7.8% from April 2024. The government has suspended the triple lock once, in the 2021 Autumn Budget, in response to the pandemic’s creation of unusual base effect distortions on annual earnings data feeding through to higher state pensions.

William Hague has weighed in, arguing that it is time to abandon the triple lock. The cost is “unsustainable” he said and “not something that can go on forever” without sacrifices elsewhere, such as reductions in benefit for working age people, and/or large tax rises. He compared the situation to a “runaway train”, driven by Rishi Sunak and Keir Starmer, neither of whom “can afford to commit electoral suicide by being alone in suggestion that some change is needed”.

Projections from The Office for Budget Responsibility point to enormous costs in future decades if the triple lock is not modified. By 2027-28, state pension spending is expected to be £23 billion in today’s terms (0.8% of GDP) higher than at the start of the decade.

Sources:
Treasury officials mull one off break from pensions triple lock; The Guardian.
Fiscal risks and sustainability report, July 2023; Office for Budget Responsibility.

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Those eligible for the existing scheme get 30 hours free childcare per week for 38 weeks of the year (during school term time) – and, if using fewer than 30 hours per week, recipients can spread it over 52 weeks. From April 2024, this will apply to two-year-olds (15 hours), then from September 2024 it will apply to those between nine months and two years. Finally, from September 2025, children between nine months and three years will receive 30 hours.

The scheme is available to people in employment and those on certain benefits. People that do not work are exempt, presumably because not working means they have time to care for their children themselves. Those with an ‘adjusted net income’ of over £100,000 per year are also exempt. Full eligibility criteria is available on gov.uk.

The government made the move for economic reasons. Against a backdrop of mounting inflation and stagnating GDP, the Tories predict that 60,000 parents may return to the workforce with the help of the scheme, those same parents having opted to care for their children themselves rather than pay extortionate prices for childcare. The CBI business group forecasts that, despite costing several billion, the free care could generate up to £10bn in further revenue.

Modern parenting, or just a phase?
The move has coincided with a push from (some) companies to get employees back in the office. As early as June 2022, Elon Musk stated that Tesla employees must come in for a minimum of 40 hours per week, or “pretend to work somewhere else”. It is less than required for factory staff, he added. In February, Amazon followed suit, mandating three days in. Their leadership team cited company culture, idea generation, and in-person learning as areas that had suffered during the WFH years.

Employees have returned to the office, but not at the same rate. Recently released US government data show that the share of men who worked at least partly at home dropped from 35% in 2021, to 28% in 2022. For women, this changed by a smaller margin – from 41.5% to 41%. One explanation for this gender disparity is that women do more housework and childcaring than men. 47% of women reported doing housework on an average day, while only 22% of men did. Equally, women with children under six spent just over an hour providing physical care (i.e. bathing/feeding), while men spent half an hour on such tasks.

While the Chancellor made it clear the 30 hours free childcare was a tactic to get women working again, a secondary outcome may be the return of women to the office, evening up the gender divide. This should have a positive economic impact for the firms that employ them, for the reasons cited by Amazon above, but will also drive increased footfall in businesses based near workplaces.

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The cost of living crisis, caused (chiefly) by the economic fallout of the war in Ukraine and debts racked up during the pandemic, has made the candidates’ economic approach top-of-mind for many Conservative Party voters, with both Truss and Sunak seeking to differentiate themselves from the other with their own financial approach. Ameliorating the current ‘stagflation’ gripping the UK will not be easy, especially when facing huge global macro-economic forces.

So how do the two candidates’ approaches differ?

To cut, or not to cut

From the start, Truss has argued for tax cuts, even when faced with mounting debt. This (should) play well with classic Conservative voters in the southeast, who favour a low tax state. She wants to ditch increases to National Insurance and corporation tax, while pausing green levies on energy bills.

Sunak, on the other hand, would not cut taxes until inflation was under control. It is unfair, he has argued, to pass the large bill accumulated during the pandemic to our children and grandchildren. Truss says that paying the debt back this way would push the UK into a recession, with her camp favouring a delayed approach to repayment, beginning in three years’ time. Sunak believes that Truss’ plans would increase interest rates, which his opponent has rejected as “scaremongering”.

Corporation tax and NI

Sunak has previously proposed an increase in the UK corporate tax rate from 19% to 25%, from April 2023. As chancellor, he previously increased National Insurance by 1.25%, starting April 2022. The rise affects both employees and employers, with the aim of further funding the NHS and social care across the country. This is accompanied by a change in the NI threshold from £9,880 to £12,750, taking 2 million lower earners out of the tax altogether, and making everyone earning under £32,000 a year better off, ultimately.

The Adam Smith Institute, a free market think tank, has stated that Sunak’s corporation tax increase would lower business investment by 7.6% and average household wages by £2,500. Seven economists wrote to The Telegraph, arguing that in fact tax cuts were necessary due to “unbearable strain” on family finances. A looser fiscal stance focused on targeted tax cuts was essential to tackle stalling growth.

VAT on energy bills

It came as a surprise when Sunak announced a halt to VAT on domestic energy bills on July 25th, with some suggesting it was brought out to save his ailing campaign. At time of writing, Sunak is trailing Truss amongst grassroots Conservative party members, despite strong endorsement from MPs. He had opposed the change earlier in the year.

Public reception

A snap YouGov poll of 507 Conservative party members who watched the BBC debate on 25th July found that Truss was seen as the better performer with 50% vs 39%. Truss also performed better on the issue of taxation (51% vs 42%), the cost of living (55% vs 34%), levelling up (51% vs 30%) and even the environment (33% vs 27%) – which is strange considering her pledge to cut green levies!

In a way, Truss’ more radical changes to the tax system are a more exciting sell, offering short-term gains to both workers and business owners. Sunak’s ‘steady as she goes’ approach is less riveting, even if economically sound from a long-term perspective. We do wonder if this has affected the candidates’ standing with the Tory grassroots.

The Hamilton Blake view

Like all good politicians, we’re not going to give you a straight answer on this one!

There are immediate advantages to Truss’ tax cuts, many of which would put more money back in the pockets of our clients and their employees, which could then stimulate investment and expansion. Sunak’s more steady approach has its benefits too though, lowering national debt through heightened taxes and – hopefully – getting inflation back in line.

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