The UK Public Finances are taking the pain of the triple lock for the basic state pension

Today in a nice accident of timing has seen the publication of the latest UK fiscal deficit and national debt figures. The timing bit works because the state visit by the Chinese President is as I discussed yesterday is at least partly an effort to send offshore some of the UK’s future borrowing and national debt needs. It will help with this. From Sky News on the Fiscal Charter.

Quite simply, it compels the Government to achieve a surplus on their budget by 2019/20, and then keep the budget in surplus each year thereafter.

Actually the get-out is that the surplus rule only applies to “normal” times and that of course does not apply otherwise we would not have an emergency Bank Rate of 0.5% and £375 billion of QE (Quantitative Easing) would we? If we look back this sort of thing has been tried before as we recall the Golden Rule of Gordon Brown. From Fact Check.

the golden rule only says that borrowing has to be balanced over an economic cycle.

The get-out used then – there is invariably a get-out – is shown below.

The trouble is that there’s no strict definition of what a cycle is.

Gordon Brown used that in the way that I expect George Osborne to use his definition of normal. Oh and it is hard to escape the irony of Gordon Brown choosing to call it a golden rule.

Right now

We have also been given a promise from the Chancellor for this fiscal year.

At this pace the national debt is lower as a share of our national income in every future year than when I presented the Budget in March.

You may note that he has defined it so that a growing economy helps twice! Why? Well we are borrowing at an annual rate of over 4% of our GDP plus paying interest on the debt so claiming that debt would fall is a step too far. Also he plans to have a little help from his friends via the accelerated sale of taxpayer owned shares in UK banks,Royal Mail and Eurostar. Care is needed here,however as such sales only help some of the numbers as the fiscal deficit misses out.

For most share sales, the proceeds will reduce the central government net cash requirement (CGNCR) and public sector net debt (PSND) but have no impact on public sector net borrowing.

How is the UK economy doing?

Let me open with something we have decided on here is a good guide to the state of the UK economy which is the tax take or revenue number.

Central government receipts for the financial year-to-date (April 2015 to September 2015) were £300.5 billion, an increase of £11.7 billion, or 4.0%, compared with the same period in 2014.

The only issue is that the payments are a combination of reasonably up to date and lagged so we get confirmation that the UK economy has been doing well. The only caveat is that we would like to have a number for population growth so that the growth was per person.

If we look into the detail we see that the main categories (VAT,Income-Tax, National Insurance) grew by more than 4% and hearteningly it seems that far from every company is doing a Starbucks or Google.

corporation tax increased by £1.5 billion, or 7.9%, to £20.3 billion

You may have spotted that all of the individual numbers were more than 4%! I looked further and the contribution from Bank of England QE fell and taxes on production apart from VAT had to be weak but are not specified.


This has been problematic for the UK government but we advance on it emboldened by the positive revenue numbers.

Public sector net borrowing excluding public sector banks decreased by £1.6 billion to £9.4 billion in September 2015 compared with September 2014…….Public sector net borrowing excluding public sector banks decreased by £7.5 billion to £46.3 billion in the current financial year-to-date (April 2015 to September 2015) compared with the same period in 2014.

So we see that a better September has been accompanied by some favourable revisions. But the reduction of £7.5 billion is less than the £11.7 billion increase in the tax take and is caused by this.

Central government expenditure (current and capital) for the financial year-to-date (April 2015 to September 2015) was £343.7 billion, an increase of £3.0 billion, or 0.9%, compared with the same period in 2014.

This poses more than a few questions for the austerity theme of the times especially if we remind ourselves that inflation is zero. Thus it is a real terms increase or fiscal expansionism, well at least my financial lexicon was well ahead of its time! Actually if we recall the the triple lock for basic state pensions then we get an explanation for around half of it. Should inflation remain low then this years increase of 2.9% will be problematic too. The Government Actuary estimates that the total cost of the triple lock will be £6 billion this year.

So what we are really saying is that there are gains for some and austerity for others. Putting it another way the increases in the basic state pension and the cuts to tax credits are not direct transfers but over time they are two sides of the same fiscal coin.

Overall when we look at our economic growth spurt the borrowing numbers remain a disappointment.

National Debt

This could be a number crunching section as the headline writers and many economists invariably highlight this one.

Public sector net debt excluding public sector banks at the end of September 2015 was £1,524.1 billion, equivalent to 80.6% of Gross Domestic Product; an increase of £70.5 billion compared with September 2014.

However if we want to compare ourselves to what is in effect the international standard then we need to look at this.

General Government Gross Debt at the end of September 2015 was £1,638.2 billion, equivalent to 86.3% of Gross Domestic Product; an increase of £78.8 billion compared with September 2014.

I have done my best on this front by persuading the Office for National Statistics to put the latter numbers on the front page of it Statistical Bulletin.

Hinkley Point

This is in the news today as the media discusses the proposed Chinese investment. Actually as I note that the start date always seems to be around the corner (rather like a Bank Rate rise) I do wonder if it will ever be built. The price of £92.5 per megawatt is so good for EdF that I suspect they are afraid it will never happen. You can have too good a deal! If the chart provided by Energy Solutions is accurate then the price seems to be trending to around £40 per megawatt. I know winter is on its way but the Hinkley Point deal faces a completely different oil price to when it was proposed. Rather an irony on Back to the Future 2 Day isn’t it.

I have seen some criticisms saying the whole plan is illiterate. I think that they mean innumerate.


Let me start with the good news which is that the UK economic growth spurt is benefiting the tax and revenue numbers. Sadly the deficit continues to disappoint as we see that austerity also seems to involve an increase in real terms expenditure especially to pensioners. Of course pensioners who rely on savings income have been hard hit as the credit crunch ball of unintended consequences –  well apart from Professor Sir Charlie Bean – bounces around.

Another favourable factor is the cheap cost of borrowing right now as we can borrow for ten years at 1.8% and thirty years at 2.59%. However that poses its own question because if we cannot finance Hinkley Point at such yields and proposed prices what on earth is going on? After all the image of China is the Chinese Dragon as some Surrey golfers are finding out.

Wentworth golfers face missing the cut after the venerable club’s new Chinese management told them they must pay a £100,000 fee or lose their membership.


21 thoughts on “The UK Public Finances are taking the pain of the triple lock for the basic state pension

  1. Hi Shaun

    I confess to being a pensioner. I would like to say that I write this in the back of my Bentley but, sadly, this is not true.

    I’m sure that your statement that inflation being zero casts the triple lock in an unfavourable light is meant tongue in cheek in view of all your other posts about the inaccuracy of the inflation statistics.

    FWIW I don’t think the triple lock is justified and, notwithstanding the recent IFS report on pensioner incomes, I was interested to read this:

    What was particularly interesting is that the biggest increases in percentage terms in pensioner incomes between 1998/9 and 20012/2013 were earnings and personal pension income, not state benefits (Page 6).

    Also in this: it shows (Page 3) that we still have one of the worst state pensioner incomes in the developed world. Some might even have the audacity to say that the triple lock was a form of catch up, but not I hasten to add, me.

    With respect to the Fiscal Charter this is of course an Osborne political stunt and is yet another small indicator that we are on the downslope.

    • Hi Bob J

      It is an awkward discussion because of the points you mention. Firstly the UK Basic State Pension is relatively low but overall pensioners have done well. There is the danger that there is something of an underclass hidden in the numbers.

      Also at a time of claimed austerity which is going to be real austerity for some on Tax Credits the switch to pensioners does poses questions especially for the gains for better off ones.

      Charlie Bean will be disappointed as just over five years ago he wanted pensioners and savers to eat into their capital

      “It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.”

      When Charlie?

      • ‘There is the danger that there is something of an underclass hidden in the numbers. ‘

        The underclass is inheriting the national debt,paying £50,000 fo a questionable degree and being expected to buy a one bed flat in London for 20 times average salary.

  2. “THE get-out being ‘normal’ times…”?
    Didn’t we just yesterday discuss the off-balance sheet nature of PFI?
    Haven’t we discussed previously that irrecoverable student loans are the means of moving grants off balance sheet?
    Be prepared for many, many more such wheezes, as I don’t believe that politicians will ever have the testicular fortitude to tax what they spend.

    • 95% taxation has been tried in Britain, and it caused a brain drain, employer flight and wealthy individuals emigrating/fleeing punitive taxation and resulted in Sterling crisis and IMF rescue.

      1 for you and 19 for me because I’m the taxman (beatles)

      • Myth.
        Brains follow research grants.
        As has been shown ON HERE, the Sterling crisis did not exist and the IMF “rescue” was unnecessary.
        You have never shown (because you can’t) that any of this was, in any way, even by the thinnest gossamer, tied into taxation levels.

  3. Hello Shaun,

    so ….Wentworth golfers face missing the cut after the venerable club’s new Chinese management told them they must pay a £100,000 fee or lose their membership.

    I’d soon sort that out – I’d classify the course a a brownfield site ripe for new housing ….


  4. I doubt the triple lock pension guarantee will last much longer. People will have to learn the hard way if necessary not to rely on government promises lasting for ever. Look at the squealing going on over the reduction in subsidy for green energy projects or the reduction in tax relief for BTL (buy to let). Anyone building a business using the premise that it will last is living in la-la land. Best to make hay only while the sun shines.

    It’s tougher when it applies to individuals or households eg with tax credits and in all probability with pensions but the same applies. We will have to rely on ourselves more and the government less.

    • ” Look at the squealing going on ”

      I did and look what I found …..

      A Starbucks spokesman said: “Starbucks shares the concerns expressed by the Netherlands government that there are significant errors in the decision, and we plan to appeal, since we followed the Dutch and OECD rules available to anyone.”

      yah it tough when companies have to pay THEIR fair share as well


  5. Great column, Shaun, as usual.
    Since the Chancellor of the Exchequer plans to bring in balanced budget legislation you may be interested in the Federal Balanced Budget Act that was part of the April Canadian budget:
    As the new Liberal government intends to run deficits for fiscal years 2016 to 2018 when the economy is forecast to be in expansion, this law will presumably be quickly rescinded under the new regime.
    The recession exemption for balancing a budget came into effect on September 1, when it was announced that the Canadian economy had had a second quarter of negative growth in real GDP in 2015. Except for my friend Jamie Carson, hardly anyone seems to have noticed that that recession cannot be declared over until there have been two quarters of positive growth. So although it now seems likely that the May decline in GDP, announced on July 31, was the last month of the contraction, and all forecasts are for adequate growth going forward, under the balanced budget legislation an end to the recession can’t be official until March 1, when the 2015Q4 real GDP update is released.
    The Harper government didn’t plan to take advantage of its own recession out clause, projecting a CAN$1.4 billion surplus for 2015-6. Whether it would have achieved this goal we will never know as the Liberals will be the government for the balance of the fiscal year. Since they maintained during the campaign that the Conservatives would have a deficit for the current year, they will use the power of the purse to make sure that there is one.
    To my mind, even if you believe in balanced budget laws, this exemption clause was drafted a little clumsily. It didn’t specify whether t
    he real GDP estimates referred to were the quarterly GDP-E or monthly GDP-P ones. A decline in real GDP of 0.1% over two quarters would be considered an extraordinary circumstance but a single-quarter decline in real GDP of 0.4% would not. Two quarters of anemic growth in GDP would be considered sufficient to take the economy out of a recession, even if real GDP remained much below its pre-recession peak.

    • Hi Andrew

      So another one bites the dust? It seems to be ever thus although of course we will never know now how long the outgoing Harper government would have stuck to its plans. Over on this side of the Atlantic fiscal rules have interpreted “when the going gets tough that tough get going” rather alternatively. I quoted Gordon Brown’s fiscal rule in the UK but at a similar time there was the Stability and Growth Pact in Europe which was mostly ignored. What about the debt ceiling in the US? The list goes on and on….

      The other bit I have always been uncomfortable with is the bit that tries to tie the hands of a future government which surely is the right of the voters to decide at the time.

      On another tack what does the election result mean for Governor Carney?

  6. sub 3% yields are fair weather conditions and they should be paying down debt now because it will be much harder to cut spending when the inevitable yield increases do happen.

    • Hi ExpatInBG

      I agree that we cannot expect such favourable conditions in yield terms to exist forever although some do! We could go forwards with projects that are expected to repay the capital as well as the interest but of course we are very poor at having any real idea what a public asset will generate.

      As to Hinkley Point we are in effect borrowing the money from China anyway and covering up the costs with high energy prices. It would be cheaper nad less risky to pay for it ourselves.

      • Maybe. UK govt projects often overrun costs and over-engineer stuff.

        I hope the UK govt has put liability for cost overruns on the constructor and/or the investor. This makes the plant more likely to be built without excessive cost overruns.

        Secondly I’d hope that having separation of investor and regulator improves safety regulation.

    • Government debt is issued at interest rates which remain constant through the term of that debt. Later yields are irrelevant to that debt.
      Whilst I prefer taxation to issuance of debt, the idea that you pay off cheap debt, because you are likely to have to borrow at higher rates in the future, I find bizarre.

      • When a bond matures, the issuer must repay in full or default. Banks have expensive sanctions against defaulters – including credit blacklists, so it has high costs.

        So most bond issuers roll over the debt by means of issuing new bonds at current market rates. Bonds are auctioned, if the issuer nominates a lower coupon ( fixed interest payments ) – the market rate to buy these bonds will be below par ( the redemption value ). For example bonds worth 100M quid might only fetch 90M quid at auction. This money is then used to repay the matured bonds.

        The UK does have some very long maturity debt – making it’s finances less susceptible to change than Greece’s short term paper. But remember that when yields tighten, chances are it coincides with a recession meaning that the new debt interest bills are taking money away when it is needed most. As we see in Greece, excessive debt is harmful.

        A debt free economy is able to devote it’s wealth to education, health, welfare, policing and so on. An endebted economy must prioritise debt interest payments to bankers before education, health etc. Not to mention the immorality of our spending today and leaving our children + grandchildren to pay our bills ….

  7. Quite agree with the above financial points re Hinkley Point. I would love to be a fly on the wall during the (hypothetical) Project meetings when the competing spooks from UK and France desperately compete with each other to stop our Chinese partners from ‘sharing’ our secrets. The French run a pretty tight ship on all this, by the way.

  8. You allude to tax taeks in your article Shaun and this is something that’s bugged me for years.Why don’t we price the national debt in relation to tax take and not GDP?

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