Former Tory minister calls 10% rise in state pension ‘ludicrous’

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Government plans to raise the state pension by 10% while forcing real-terms pay cuts on public sector workers have been attacked as “ludicrous” by a former Conservative Treasury minister.

Jim O’Neill, the former Goldman Sachs chief economist who served as a minister under George Osborne, said it was “crazy” to protect pensioner incomes while younger people’s wages were being eroded by the highest inflation rates for 40 years.

Asked why pensions were rising in line with inflation when ministers were urging public sector pay restraint, Lord O’Neill told BBC’s Radio 4’s Today programme: “I have no idea. It seems to me pensioners, given the pressure on fiscal policies and inequalities, the constant protection of pensioners seems ludicrous in itself and in these circumstances particularly crazy.”

With pressure mounting on the government as it faces down rail unions amid the most widespread strikes on the network since the 1980s in a dispute over pay and conditions, Rishi Sunak defended the plan to boost pensions while enforcing pay restraint across the public sector.

The chancellor said that, unlike pay increases, a big rise in pensions income would not stoke inflation across the economy. “It’s right that we reward our hard-working public sector workers with a pay rise, but that needs to be proportionate and balanced with the need not to make the inflationary pressures worse and also to see what’s affordable for the taxpayer.

“The slight difference with pensions is that pensions are not input costs into the cost of producing goods and services that we all consume, so they don’t add to inflation in the same way.”

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However, O’Neill warned the government lacked direction on the economy, while also criticising central bank chiefsfor displaying “groupthink” when it came to the effect of quantitative easing and low interest rates on inflation.

“The government needs, instead of jumping from one policy and seemingly trying to pander to everyone’s whims, to develop a clear and articulate policy framework of which we don’t have one,” he said.

Official figures show the government’s preferred measure of inflation rose to 9.1% in May from 9% a month earlier, hitting the highest rate since February 1982. It comes as the government attempts to face down rail unions amid the most widespread strikes on the railways since the late 1980s in a dispute over pay and conditions.

Boris Johnson has warned workers against asking for bigger pay increases because it could risk a “wage-price spiral” similar to the 1970s, in a marked shift from language used last October when he claimed Britain was on a path to becoming a high-wage economy under his leadership.

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Sunak confirmed last month that the pensions triple lock would be reinstated, while benefits would also rise in line with the rate of inflation, from next spring. Under the triple lock, state pensions are increased in value each year by either the rate of inflation for the previous September, earnings growth for the previous July, or 2.5%, whichever is highest.

Forecasts from the Bank of England suggest inflation as measured by the consumer prices index will probably hit 10% in September, putting pensions and benefits on track to rise by that double-digit amount next spring.

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The chancellor committed to reinstating the link with inflation after facing heavy criticism from Tory backbenchers for suspending the triple lock last year, which would have led to an 8% increase in pensions and benefits from April 2022.

The return of the policy was confirmed in parliament on Tuesday by Simon Clarke, the chief secretary to the Treasury. “Next year, the triple lock will apply for the state pension,” he said.

“Subject to the secretary of state’s review, pensions and other benefits will be uprated by this September’s consumer prices index which, on current forecasts, is likely to be significantly higher than the forecast inflation rate for 2023-24.”

However, ministers including Clarke have repeatedly warned that offering public sector workers pay rises close to the rate of inflation would “prolong and intensify” the cost of living crisis.

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O’Neill, a crossbench peer who is now helping with a business policy review for Labour, said the government did not have a “clear and articulate policy framework” for its economic programme.

“I am waiting for them to have a clear framework for their economic policy. The whole levelling up and ‘Northern Powerhouse’ stuff … is going to get lost again in all of this.”

Dominic Raab, the deputy prime minister, defended the government’s actions on public sector pay, saying raising it could lead to a “vicious cycle of inflation”. He said it was right to hold out against higher wages for rail workers, who are striking this week over their pay, saying the government must not give in to “militant unions”.

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Defending the decision to raise pensions in line with inflation, he said: “[Pensioners] are particularly vulnerable and they are disproportionately affected by the increase in energy costs which we know everyone is facing.”

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