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Jeremy Hunt should scrap the pension triple lock to pay for net zero policies, the Organisation for Economic Cooperation and Development (OECD) has said.
The Paris-based organisation said as high interest rates erode public spending, the Government should look for ways to free up cash and reduce the UK’s debt pile by scrapping costly policies such as the state pension triple lock.
Currently, the triple lock means the state pension rises by the highest of inflation, average earnings or 2.5pc. Next year, it is going up by 8.5pc, from £10,600 to £11,502, matching wage growth.
The anticipated rise comes as the UK faces increased decarbonisation costs and a surge in interest payments on the national debt, the think tank said.
Slashing emissions from power, cities, and industry is set to cost the Government 0.5pc of GDP per year, the OECD said – equivalent to around £14bn.
The loss of fuel duty from the move to electric cars is forecast to cost another 0.4pc, or around £11bn per year, by 2030.
“Maintaining and strengthening current fiscal efforts is essential against the challenging backdrop of high borrowing and debt, and as higher debt interest payments have eroded fiscal headroom,” the OECD said.
“Reforming the costly triple lock uprating of state pensions would help, by indexing pensions to an average of CPI and wage inflation.”
The combination of Britain’s ageing population, high inflation and the triple lock will push up spending by 0.8pc of GDP by 2027-28, equivalent to almost £25bn.
The pressure on the public purse comes at a time when the British economy is already struggling.
The OECD’s economists, led by Clare Lombardelli, formerly the chief economic advisor to the Treasury, expect UK GDP to grow by just 0.5pc this year and 0.7pc in 2024.
This is the weakest performance in the G7 aside from Germany, which is set to shrink this year.
The OECD said cuts to the headline rate of national insurance as well as the “full expensing” policy which encourages businesses to invest should help the economy in the long run.
But it also warned that “fiscal pressure on households and businesses has increased significantly since the spring Budget, due to the freeze of income tax brackets and the corporate income tax rate increase”.
It hopes Mr Hunt’s tax tweaks could ultimately boost the economy, adding that extra growth “could enable the Government to reduce fiscal pressure by gradually increasing labour market participation and business investment”.
However, this possibility then runs up against the costs of net zero policies which limit the Government’s room to loosen the purse strings elsewhere.
Debt and decarbonisation are challenges across much of the rich world, the think tank said.
“In many countries, fiscal pressures are mounting. Demographic changes, decarbonisation, and a combination of rising interest payments and slow growth mean countries face a challenging fiscal outlook,” the OECD said.
“Governments need to take bold action to reduce such pressures and give a greater focus to growth in their policy making.
“That means reforming labour market and pensions policies, increasing competition, and using fiscal levers to increase human capital and productivity enhancing investment, including the investment needed to deliver the green transition.”
When it comes to central banks, the OECD said the cost of borrowing “needs to remain restrictive until there are clear signs that underlying inflationary pressures are durably lowered”.
“Policy rates appear to be at or close to their peak in most advanced economies, although some additional rate rises could still be needed if underlying inflationary pressures prove persistent,” it said.
In the UK, the OECD does not think the Bank of England will be in a position to cut rates at all next year, from the current level of 5.25pc.