A period of negative inflation could give the government the perfect opportunity to u-turn on its manifesto promise and justify scrapping the pensions triple lock, according to former pensions minister Sir Steve Webb.
Sir Steve, partner at consultancy LCP, said chancellor Rishi Sunak could argue a period of negative inflation was the time to abolish the triple lock, or justify a smaller increase, because it would mean prices are falling and therefore pensioner living standards would already be improved.
Unless there is a strong recovery in the economy, LCP has suggested that CPI inflation could be negative in September, and could even fall below -2 per cent meaning it would be “a lot easier” to justify not increasing the state pension by the 2.5 per cent implied by the triple lock policy.
CPI inflation has already fallen sharply from 1.5 per cent in the year to March 2020 to 0.8 per cent in April 2020.
A further fall is expected when the inflation figure for May 2020 is published later this week.
Under current rules, the state pension is increased by the triple lock which is the highest of earnings growth, price inflation or 2.5 per cent a year.
In their manifesto, the Conservatives vowed to stick to their pension triple lock promise but the government has been advised to use this option to pay off some of its coronavirus debts.
At a Treasury committee hearing last week (June 9), Torsten Bell, chief executive of think tank the Resolution Foundation, told MPs he thought the triple lock “was going in its current form, at least temporarily” from next year as average earnings were expected to increase by up to 18 per cent after sharp falls this year.
Therefore unless the government reviews its triple lock policy, pensioners could see a huge uptick in their state pension in a period when the government is dealing with mounting debt.
Sir Steve said while scrapping the triple lock and effectively freezing the state pension would be seen as a “radical move”, a more modest approach would be to announce a modified triple lock, with a lower increase of 1 per cent or 1.5 per cent.
Each percentage point shaved off the state pension uprating would save the government just over £1bn per year, he said.
According to Sir Steve, the chancellor could justify this smaller increase as much of the economic pain of the pandemic has been felt by the working age population, especially with unemployment rising.
He could also argue the triple lock pledge was made before the current crisis which could not have been foreseen.
Sir Steve said: “The 2017 Conservative manifesto floated watering down the triple lock, and there can be little doubt that the Treasury would like to see this commitment go.
“From the government’s point of view, a period of negative inflation when prices are actually falling would be the ideal time to justify not sticking to the 2.5 per cent floor implied by the triple lock.