Starmer Looks to UK Pension Lift to Calm Row Hitting Labour

Tom Rees and Irina Anghel
·5-min read

(Bloomberg) -- Millions of UK pensioners are in line for an extra £500 ($660) next year, a boost the new Labour government hopes will contain a row that’s raging over cuts to winter fuel subsidies for the elderly.

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Labour has pledged to keep a guarantee to increase the State Pension each year by the highest of earnings growth, inflation or 2.5%. How much it will go up in April is set to be revealed on Tuesday when official pay data are released.

With inflation now close to 2%, wages will again be the key factor. Economists expect annual pay growth including bonuses of 4.1% in the three months through July, the period used for the earnings component of the so-called Triple Lock.

While that would be the slowest pace in almost four years, it’s still a costly commitment for Prime Minister Keir Starmer and Chancellor of the Exchequer Rachel Reeves. It would mean an extra £475 a year on the full State Pension and raise spending on the benefits by more than £8 billion to £146 billion.

The government has repeatedly drawn attention to Triple Lock as it faces mounting pressure from both opposition parties and Labour lawmakers over the removal of a £300 winter fuel payment from all but the poorest. The move, it says, was needed to help plug what it claimed to be a £22 billion black hole in the public finances left by the previous government.

“I don’t think anyone wants to see this proposal around the winter fuel allowance brought in,” Diana Johnson, a Labour Home Office minister, told the BBC on Monday. “But actually, as the prime minister has said, we’re going to have to make some tough decisions.”

Reeves will attempt to allay concerns among Labour MPs about the cut to winter fuel subsidies when she addresses them Monday afternoon at the party’s weekly parliamentary meeting. The government has sought to defend the policy by pointing to its move to extend the household support fund and encourage more elderly people to claim pension credit, but has not ruled out introducing further measures to soften the decision on winter fuel.

“The increase in the State Pension will outstrip the loss for pensioners of the winter fuel payment — that is really, really important,” Starmer told the BBC on Sunday in his latest defense of the subsidy cut. Shortly after the labor statistics on Tuesday, the prime minister will face a major test of party unity when lawmakers vote on the decision.

While Starmer stopped short of issuing any ultimatums to Labour MPs, he said they needed to do some unpopular things to deliver the broader change that voters expect. “I am absolutely convinced that we will only deliver that change — I’m absolutely determined we will — if we do the difficult things,” he said.

The tight spot Labour finds itself in stems from its decision not to scrap the triple lock, a policy that dates back to 2010 when the Conservatives took office. Though expensive, it is difficult to reverse given fears of alienating older voters. It has been applied in every year except 2022-23, when it was suspended due to a one-off surge in wage growth caused by the pandemic.

It is adding to spending pressures at a time when Reeves is grappling with a stubbornly high budget deficit. The chancellor has already hinted at tax rises and further spending cuts in the budget on Oct. 30. Labour is pursuing the same fiscal rule as the Tories — to have debt falling as a share of GDP in five years, against which there was deemed to be a margin of just £8.9 billion in March.

“What we’re going to see is the spending increases that we have coming down the track really more than using up the headroom that the chancellor had at the spring budget,” said James Smith, research director at the Resolution Foundation. “We’re now going to see those pension pressures adding to that.”

The data may offer better news for the Bank of England, which cut interest rates for the first time since the pandemic last month amid hopes that price pressures in the labor market are now starting to moderate. Wage growth excluding bonuses, the gauge watched by the BOE, is forecast to have eased to 5.1%, the slowest rate since 2022.

However, that’s still faster than policymakers would like, and economists expect a further dip in the unemployment rate to 4.1% in the three months through July. As a result, markets are not pricing in another rate cut until November, with the Monetary Policy Committee expected to hold rates at 5% this month.

Regular wage growth at around 5% “is too strong for rapid Bank Rate cuts,” said Robert Wood, chief UK economist at Pantheon Macroeconomics.

Separate data from the Recruitment & Employment Confederation on Monday showed starting salaries grew at the slowest pace in five months while hiring slowed in August. Businesses are letting people go and posting fewer vacancies, in signs borrowing costs close to a 16-year high continue to weigh on demand.

IT and computing, construction and retail were the sectors seeing the sharpest fall in permanent vacancies.

“This month’s survey supports what we have been hearing around the country – employers are still cautious,” said REC chief executive Neil Carberry. “They are waiting for a clear signal that sustained demand is around the corner. The new government said growth was its main priority – but it needs to deliver now.”

--With assistance from Andrew Atkinson, Jessica Shankleman, Ellen Milligan and Joe Mayes.

(Updates with minister comments, Reeves meeting from sixth paragraph.)

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