Andy Burnham has been handed an early to-do list by the OECD, and at the top sits a warning every business owner should read: Britain’s state pension system is “unusually generous”, and scrapping the triple lock would save the public purse more than £60 billion.
The Paris-based think tank, one of the world’s most respected forecasters, said moving from the triple lock to indexing the state pension against either inflation or average earnings would save 2 per cent of GDP in the long run, the biggest saving of any fiscal reform it put forward.
For the SMEs that employ most of Britain’s private sector workforce, the arithmetic is not academic. If pension spending is not tamed, the money has to come from somewhere, and recent history suggests it comes from taxpayers, employers prominent among them.
In its annual survey of the UK economy, the OECD urged the incoming prime minister and future governments to “prepare a medium-term reform of the triple lock that preserves pension adequacy while improving fiscal sustainability and reducing expenditure volatility”.
“Under the triple lock, state pensions have risen significantly faster than earnings, adding fiscal pressures and uncertainty, particularly during periods of macroeconomic volatility or weak growth,” the OECD said.
The intervention makes the OECD the latest in a lengthening queue. The Office for Budget Responsibility’s latest fiscal sustainability report warned that state pension spending is on course to almost double as a share of the economy, from 5 per cent of GDP to about 9 per cent by the 2070s, if the triple lock survives. The same watchdog cautioned only days ago that stealth tax rises could shrink the workforce by two million, a reminder of what happens when governments quietly load the burden elsewhere.
The politics, however, remain immovable. Torsten Bell, parliamentary secretary in the Treasury, said the triple lock would not be changed in this parliament, with ministers focused instead on reform of private pensions. Burnham himself committed to keeping the lock this month, despite Jim O’Neill, tipped as a key economic voice around the incoming prime minister, insisting the triple lock “needs to be dealt with”.
There was more comfortable reading for Burnham elsewhere. The OECD backed his plans to devolve powers to cities and regions, calling deeper devolution “an essential step towards giving local institutions the powers and certainty that is needed to drive regional productivity”. Fixing Britain’s regional productivity gaps, it said, will be key to raising long-term growth. Burnham has promised a “No 10 North” in Manchester, and Rachel Reeves has already described fiscal devolution as her “unfinished business”.
Small firms should also note the OECD’s prescription for tax. It urged a revamp of the exemptions and cliff-edges built into income tax, VAT and national insurance, thresholds that many small businesses actively trade around. “We are not proposing tax rises, but to make the tax base as broad as possible,” said Asa Johansson, director of the OECD’s policy studies research.
The backdrop is soft. The OECD expects growth to slow to 0.9 per cent this year from 1.4 per cent in 2025, largely on the back of high energy prices caused by the US-Iran war, before edging up to 1.1 per cent in 2027. Inflation is forecast to fall from an average of 3.7 per cent this year to 2.4 per cent in 2027.
Reeves, the chancellor, preferred the glass half full. “The OECD agrees that we have restored stability, putting the economy in a much stronger position than it was two years ago. We are forecast to be the fastest-growing G7 economy in Europe this year and next and, for the first time since 2004, we are forecast to borrow less this year than the G7 average.”
For business owners, the message between the lines is less cheerful: the bill for the triple lock is growing, nobody in power will touch it, and the broadest shoulders in the tax system have a habit of belonging to those who run payrolls.
