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Jhe government has gotten itself into a nice mess over the triple-locked pension guarantee, David Cameron’s bribe giveaway to older voters in 2010 that has ricocheted over the years. On the one hand, Boris Johnson and Rishi Sunak argue that giving inflation-matching pay rises to public sector workers would risk causing an “inflationary spiral” and should therefore be avoided. On the other hand, the Chancellor argues that a 10% increase in the state pension – a figure likely to be produced by the triple-locking formula – would not create inflationary pressures.

The position makes no sense. Income increases, whether provided through pension payouts or compensation packages, all contribute to aggregate demand and spending capacity. Sunak’s attempt to draw a distinction – “pensions are not an entry cost into the cost of producing the goods and services we all consume, so they don’t add to inflation in the same way”, he said – only fueled the sentiment of naked political patronage. Teachers, to land on the next battleground of negotiations, don’t make soap scum either.

The underlying problem is that the triple lock formula rewards volatility. It takes the highest of three readings – the inflation rate for the previous September, revenue growth for the previous July, or 2.5% – and applies it to the April upgrade. state pension. Last year Sunak was forced to abandon the formula as earnings growth was all over the place (having fallen with the Covid it then rebounded strongly). The relevant inflation rate of 3.1% was used instead in the interest of “fairness” to young and old in the “exceptional circumstances” of a pandemic.

It would be hard to say that today’s circumstances are less exceptional. As the government discovered on Thursday, rising inflation is having its predicted savage effect on the debt service costs of pegged gilts. The interest bill stood at £7.6bn in May, underpinning the particular threat that inflation poses to the UK. If restraint is meant to be a way to tame the beast, the process should be seen to apply equally across the board.

The respectable argument for sticking to the triple-lock formula this time is that pensioners did their part a year ago and inflation has now outpaced last year’s rise in incomes. It is also true, as campaigners say, that the UK’s state pension (currently £9,500 a year) is not generous by the standards of wealthy European countries. Yet, at present, this amounts to justifying the targeting of public pensions to the poorest retired households. As the Institute of Economic Affairs points out, “retirees as a group are less likely to be in poverty than, say, families with young children.”

If targeting is impossible for practical purposes, it comes down to difficult political choices and the need to avoid inconsistencies. Jim O’Neill, former treasury minister in the future Cameron government, called this week “crazy” to fully protect pensioners’ incomes from inflation as young people’s wages erode at the fastest rate in 40 years . This is a harsh message, but correct.

Sunak faces tough demands from the oil and gas industry

A “frank and constructive meeting” is what industry lobbyists say when they know that half of their demands will not be met. The same goes for the North Sea oil and gas industry, which is trying to ease the windfall 25% tax on its profits.

It seems virtually impossible for Sunak to grant two demands made during Thursday’s face-off in Aberdeen. He specifically ruled out giving tax relief on decommissioning costs when he unveiled the Energy Profits Tax last month. And, while he’s serious about raising £5billion in the first 12 months, the Chancellor can’t backdate the generous 91 pound pence investment allocation to cover projects that are set to close. to start up ; the allowances were created to encourage future investments.

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One request, however, seems more realistic: it would be in the spirit of the Treasury’s thinking to allow carbon capture projects to claim quotas. And one detail in the final legislation, due to be unveiled next month, is definitely key: clarity on when the tax will end.

The end of 2025 is the last point, but the return of “historically more normal” market prices would move the moment forward, Sunak said. It is assumed that the Treasury is imagining something in the range of $65 to $75 for a barrel of Brent (against $110 today), but precision matters in investment decisions. With gas, it’s probably even harder to define “normal”, so that’s another important moving element.

And how long should the lower levels persist? One day? A month? On such issues, one can almost have sympathy for the industry. The windfall tax was rushed, but it’s still amazing that critical elements were left to hammer.


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