What Burnham as PM would mean for benefit cuts and pensions

An Andy Burnham premiership is unlikely to make “significant” savings to the ballooning welfare bill, economists have warned.

In the run-up to today’s by-election, the Mayor of Greater Manchester has said he wants to reduce social security spending by rethinking education and supporting young people, rather than “crude cuts”.

But economists have argued that “tinkering around the sides” is unlikely to address surging welfare expenditure in the short term – which is predicted to hit £400bn by the end of the decade, according to the Office for Budget Responsibility (OBR).

Shorts

Scroll to previous short

Scroll to next short

A key driver of this is the state pension triple lock – the guarantee that pensions will rise by the higher of 2.5 per cent, inflation or average wage growth. Burnham has committed to maintaining the lock until at least the end of this Parliament. He has also hinted that the next government should “look at” the tax paid by pensioners.

State pensions are likely to be dragged into tax brackets from next year, as they rise, but tax thresholds remain frozen.

Burnham’s comments on pensions and benefits may land well with Makerfield voters – the constituency is home to higher-than-average proportions of pensioners and people claiming personal independence payments.

But if the Mayor wins the crucial by-election and a subsequent challenge to Sir Keir Starmer, he will find himself bound by the same economic constraints as the PM, economists warn.

Benefits: ‘Reduce welfare spending for defence’

Burnham has vowed to slash the welfare bill to boost defence, but he prefers holistic reform focused on tackling the root causes of youth unemployment rather than changes to eligibility for benefits.

Speaking to The i Paper, he said the welfare bill should be reduced by “rethinking the education system” and supporting young people into work rather than “crude cuts”.

Burnham has backed Alan Milburn’s initial report on young people not in education, employment, or training (Neet) – which stated that the Government spends 25 times as much on benefits for young people than it does on supporting them into work.

Burnham has outlined plans to address youth unemployment while boosting defence by insisting that every government contract given to British industry must include a “social value” commitment, such as work placements or apprenticeships for young people, as reported in The Times.

He also plans to draw inspiration from Greater Manchester’s experience of running devolved employment support programmes, linking up services and giving local leaders more powers to support people into work.

However, Jonathan Cribb, deputy director at the Institute for Fiscal Studies (IFS), questioned whether these policies would convince the OBR that “significant savings” could be made in the short term.

He said the public finances watchdog would be “much more confident” if spending were controlled by measures that “change the actual financial entitlements”, compared with changes “around the edges” that attempt to reduce the number of people accessing the welfare system.

Cribb questioned whether these peripheral changes would “generate savings in the next five years – if there are any – or is it going to generate savings in 20 years time?”.

Nicholas Barr, a professor of public economics at the London School of Economics, said Burnham’s direction of travel of supporting was “absolutely right” as it is economically desirable to “invest in human capital” rather than funding benefits.

But he added that investment was unlikely to “save money” to bolster the defence budget in the short term.

Pensions: The triple lock is safe – for now

Burnham has ruled out abolishing the triple lock during this Parliament, previously telling The i Paper that rowing back on Labour’s manifesto promise not to do so would be “very damaging”.

However, he has not spelled out what would happen to the policy beyond 2029.

While many politicians believe reforming the triple lock would be too politically toxic among older voters, a growing number of Labour MPs have been lobbying for Burnham to axe it to release money for defence and young people.

Many economists also argue it is unaffordable in the longer term. The state pension costs £146.1bn a year, which is around 5 per cent of gross domestic product (GDP), and the largest single contributor to the total £322.6bn that the Government spending on the social security system.

Andy Burnham attends a Saturday breakfast club in Ashton-in-Makerfield to meet retired miners and local organisers (Photo: Christopher Furlong/Getty)

Alex Clegg, an economist at the Resolution Foundation think-tank, said it would be “encouraging if the debate around what could happen with the triple lock can be had ahead of the next election and going into the manifesto period for all parties”.

The foundation – formerly run by the Government’s pensions minister Torsten Bell – recently proposed transitioning to an Australian-style system, which tracks wage growth but protects the value of the state pension from temporary price shocks by pinning it to inflation in times of economic uncertainty.

Clegg’s analysis suggests switching to this policy could have saved £12.6bn since 2011, when the triple lock was introduced.

Will Prescott, head of research at think-tank Bright Blue, said Burnham must look at “big ticket items” such as the state pension if he wants to bring down the welfare bill, rather than “tinkering around the edges”.

“If you really want to touch the welfare bill, you are going to have to start going for the really big ticket items, and that will, unfortunately, be politically extremely painful to do,” he told The i Paper.

However, he said his “deep fear” was that a Burnham premiership would be “more of the same, but with better presentation”, adding: “We can’t keep spending ever greater sums of a shrinking pie and heavily crushing the next generation in tax.”

Considering tax cuts for older people

Burnham has also suggested in a recent interview with The i Paper he would “look at” tax cuts for older people.

He said the growing number of older people being drawn into paying income tax through frozen tax thresholds – “fiscal drag” – was an issue that the next government “need[s] to look at as well”.

One option would be reforming or replacing the triple lock so that fewer pensioners hit the income tax personal allowance annual threshold of £12,570.

At the moment the state pension is 12,547.60 a year, meaning it is highly likely to go over the personal allowance threshold next year. While any tax paid will be initially minimal, it will be an unwelcome symbolism of the UK’s tax burden.

Another option – proposed by the Tories at the 2024 general election – would be applying the triple lock mechanism to the tax-free allowance for pensioners so that it rises in tandem with pensions, meaning that retirees living on the state pension would never have to pay income tax.

At the time, the IFS estimated that it would cost £2.4bn a year by the end of the 2024-29 Parliament.

Barr, from LSE, suggested that ministers could offer a “political quid pro quo” for pensioners by raising the tax threshold while also scrapping the triple lock.

However, he said this could be “quite expensive” as it means raising the threshold for all pensioners, including those on high occupational pensions.

What Burnham as PM would mean for benefit cuts and pensions

Tags: