Misconceptions following Burnham’s speech

 

The Prime Minister’s conference speech was a week ago, but there is still plenty of confusion about how it should be interpreted. Indeed that confusion may be partly shared by Burnham himself. Here is what I think it all means.

The Triple Lock

The Triple Lock is the way the UK state pension has been uprated every year for more than a decade, and it has led to pensions rising faster than earnings. Whatever you may think about this so far, it is clearly unsustainable in the long run without additional tax rises or spending cuts, given that the state pension is paid for by those currently working, and the ratio of those receiving a pension to those working is rising not falling. This unsustainability is clear in the OBR’s long term projections that I discussed here.

The UK state pension is well below the level in many European countries, but that is because the UK has always had a mixed system of public and work-based pensions. There is a good argument for increasing the state element in that mix, but also a clear argument against. [1] However the Triple Lock is a strange way of increasing the state element, because it does it in an unpredictable way. It would be better for many reasons to make a shift towards a bigger state pension an explicit policy goal.[2] .

The reason why ending the Triple Lock is such a political risk is that it will be portrayed by political opponents as an attack on current pensioners, and pensioners tend to vote in greater numbers than workers. Since Burnham’s speech that is exactly what has happened. This is the first misconception. Pensioners only benefit from the Triple Lock when earnings increase by less than inflation or 2.5%, and the number of periods when that will happen for most current pensioners will be small. The real benefit comes for those currently working, because the number of such periods will be larger by the time they start receiving a pension. Unfortunately intertemporal thinking is beyond most political/media discourse, so ending the Triple Lock will be portrayed as an attack on current pensioners.

Burnham is to be congratulated for having the political courage to adjust the Triple Lock so that it moves with rather than beyond earnings over the medium term. He is also to be congratulated for having the political skill to link ending the Triple Lock with the establishment of a National Care Service. He has made it look like the former is necessary to create the latter, producing a benefit that goes with the cost of slightly lower pensions. Polls taken just after the speech confirm this. But in this case linking extra spending to budget savings is about politics rather than economics, as I note below.

Although the Triple Lock is not planned to end until 2030, legislation will be introduced before the next election, so the battle over this is not being postponed until the next election.

A National Care Service

Getting the state to pay for elderly care in the same way as it pays for most other health needs through the NHS is about insurance. We don’t know when we might need health care, and such care is very expensive, so it makes sense to take out insurance against that possibility. But for well known economic reasons it is very difficult for the private sector to provide that insurance, and much easier for the state to do so, which is why the NHS makes sense. Exactly the same arguments apply to insuring against the need for non-NHS care when we grow old. (In fact most state spending is about insurance.)

Extending state insurance to cover elderly care requires people to pay insurance premiums, which means paying more tax, or cutting some other spending. Resistance to higher tax is a key reason why previous attempts to do this have failed. For the moment at least, Burnham has avoided this problem by suggesting that ending the Triple Lock will fund the new National Care Service.

Which may be fine politically, but as the OBR’s fifty year projections make clear this doesn’t hold water in economic terms, because this element of the Triple Lock was never sustainable beyond the short term. Saying otherwise means the government is in effect replacing one unsustainable element of spending with another. Whether Burnham understands this but just wants to keep the trade-off alive for political reasons is unclear. The reality is that introducing the National Care Service will require higher taxes, and if this service is also to raise the quality of care and the wages of carers (as Burnham suggested), taxes will have to be significantly higher. More than ever a new Labour leader needs a Chancellor who is able to deliver what he needs. Whether he will is the biggest question mark behind Burnham’s speech.

The EU, Electoral Reform and more

One other notable feature of Burnham’s speech was the acknowledgement that Brexit has not worked and that some substantive reversal of it will be required, including the possibility of rejoining. Another misconception among some is that the speech didn’t talk enough about economic growth. This misses the fact that a substantive realignment towards the EU on trade is the most assured and probably largest pro-growth measure the government could take.

Burnham’s recognition that the tipping point in terms of popular opinion on Brexit has been reached is overdue. In addition, it allows the government to pinpoint the blame for the lack of growth in living standards over the last decade on Brexit and those that campaigned for it. The government can now investigate whether popular opinion would be happier to move towards the EU incrementally, or whether a seat at the table will be seen as sufficiently important for ‘going all the way’ to become the preferred option. Of course a lot of additional questions remain, but on this issue once again incrementalism has been replaced by more decisive action.

In a post in June I suggested three major medium term policies besides undoing Brexit that Burnham needed to start putting in place over the next three years. One, greater power to English regions, was a reasonably sure bet. The second, setting out the alternatives to FPTP and choosing among them, he put in place in last week’s speech. The third, doing something about Leveson 2 and OFCOM, has yet to happen.

Ending the Triple Lock in this parliament, creating a National Care Service and a new electoral system in the next, together with probably a significant reduction in trade barriers with the EU and possibly rejoining, are the kind of major changes both I and I think a lot of the electorate were looking for two years ago with the election of a Labour government, but which Starmer was unable and I think unwilling to deliver. Starmer and his team thought the safest option was to do small things but otherwise stay close to their enemies because that had worked in opposition. The opposite was obviously and predictably true, and Burnham and his team seem to understand that..

More importantly, these issues are much easier to argue for than their detractors would have you believe. Do you really want pensions to rise faster than the earnings of those who pay for them? Why shouldn’t the elderly and their relatives be able to insure themselves against the cost of long term care? Brexit has clearly made us a lot poorer, so this isn’t Project Fear anymore. Does it make sense for so many votes not to count in a general election?

For this reason my biggest concern is not whether Labour can sell all this to the electorate, but whether it has understood that some of them, together with additional defence spending, require additional increases in taxes on incomes. The effective tax rates on incomes for middle earners is still below levels in the mid-2000s, and even lower than levels in the 1980s, yet a growing elderly population and other pressures have increased health spending from 4% in the 1980s to over 8% today. The bit of honesty that has so far deserted all our politicians is that taxes on income have to increase.

This is not just about fiscal rules, still less about treating the government like a household. It is about competition for real resources, particularly labour. If the government starts paying for elderly care but does nothing else then the private sector has more money to spend on other goods and services, adding to inflationary pressure. Bond markets already require a higher interest rate on UK debt compared to other G7 countries because they believe UK interest rates will have to stay relatively high to combat inflation. In these circumstances, and with the public sector needing more rather than less resources, it is just basic macroeconomics that taxes need to rise.

[1] A major argument for a state pay as you go pension is that the value of that pension does not fluctuate with movements in the stock and bond markets. In a funded scheme that is not the case, and that means that those that receive the pension bear at least some of that risk. The major argument against a larger state pension is that those who work hard during their working life get the same pension as those that don’t, which will certainly feel unfair to the former. Entitlement rules only get around that to some extent.

[2] Part of the reason for this is that such a goal would influence the uptake of private pensions.