by Dr. Mike Jones, researcher
As we’ve written before, inflation is the ultimate stealth tax. We all feel the effects of it when we buy our weekly shopping, fill up our cars, or pay our energy bills.
On Wednesday, it was announced that consumer price index (CPI) inflation for the year to September was 10.1 per cent. The announcement was particularly significant. The September 2022 CPI rate is the figure used to uprate public sector pensions, the state pension and other benefits for 2023. These increases are inevitably ‘funded’ by higher borrowing. And this borrowing is essentially deferred taxation - it makes future generations pay for public expenditure today.
One way to monitor the size of the hidden ‘inflation tax’ is to adjust budget forecasts for CPI. Our analysis suggests that total public spending on uprated social security and pensions could rise to £222 billion in 2023, up £20 billion from a year ago. If all other benefits are included in the uprating process, then that figure jumps to £310 billion, up a monstrous £28 billion.
Let’s start with the benefits which must be automatically uprated by law. Primarily, that’s the disability living allowance, attendance allowance, personal independence payment (PIP) and carer’s allowance.
Then we have other benefits. These are the optional increases - some of which were recently subject to an almighty row at Tory conference. We’re talking about employment and support allowance, jobseeker’s allowance, income support, statutory sick pay and maternity pay, universal credit, tax credits, and child benefit.
We can put those together with pensions, both the state pension and public sector pensions. For arguments sake - noting these are very simple calculations, just to illustrate the point - here are the sort of numbers we're talking:
|Social security and pensions (£bn)|
|Public sector pensions (unfunded)||45.3||45.5||46.9||51.6|
|Change 2020-21 to 2023-24, excluding other benefits||32.7|
|Change 2020-21 to 2023-24, including other benefits||43.5|
To put this in context, the government will have to spend around £32 billion more in 2023-24 (paid for ultimately from future taxpayers) than it did in 2020-21. If all other benefits are included in the uprating process, then that figure jumps to around £43 billion. At a time when taxpayers are labouring under a 70 year high tax burden and families are spending a greater share of their income covering the cost-of-living crisis, inflation looms large over future taxpaying generations. While the purchasing power value of benefits uprated with inflation does not, of course, change, the cost to taxpayers does increase faster than taxpayers’ own earnings at a time like now when real earnings are falling.
That is not to say these definitely shouldn't increase by inflation. But the estimates here give some idea of the numbers involved. These huge sums should weigh on the minds of politicians who doggedly insist that all these benefits should rise by inflation - rather than, say, the (currently) more modest figure of earnings. These are big political decisions, worthy of debate.
That debate should include public sector pensions too. Given the current challenges facing the economy, perhaps now is the time to reconsider the automatic annual uprating of public sector pensions. Just reducing the uplift in public sector pensions in line with the (currently lower) increase in average earnings of 5.5 per cent would save the taxpayer around £2 billion next year. And don’t forget, public sector retirees will also be in receipt of a state pension in addition to their government pension. If current contracts can’t be changed, perhaps the answer is to taper away the state pension for people with public sector pensions?
Whatever the answer, let's not forget that the pension contributions made by public sector employees do not come close to covering the huge cost of the final salary pensions they are entitled to. The bill is picked up by ordinary taxpayers who could only dream of such generous retirement schemes.
It’s high time these over-generous pension schemes were closed and public sector benefits brought in-line with those that people in the private sector (who pay for the public sector) can get. The recent CPI numbers will inform many important political decisions for taxpayers. Let’s make sure they are debated properly.