Millions of people are poised for an above-inflation 4.7% increase in their state pension payments, adding to pressure on the government finances as Rachel Reeves explores raising taxes at the autumn budget.
Labour has committed to retaining the triple lock on the state pension, which guarantees annual increases in line with whichever is the higher of 2.5%, inflation in September or annual earnings growth in the three months to July.
Official figures published on Tuesday show average weekly earnings including bonuses were 4.7% higher in May to July than in the same period a year earlier.
Experts said the increase put state pensioners in line for their payments to go up by that amount from next April because inflation in September – currently running at 3.8% – was unlikely to be higher.
A final decision will be taken by the government before the budget. However, Pat McFadden, the work and pensions secretary, confirmed on Tuesday that the triple lock promise would be honoured.
“That’s a commitment from the Labour government to the UK’s pensioners,” he said. “It’s something that we said we’d do at the election and something that we will keep to.”
The latest figures are expected to translate into an annual rise worth more than £500 for those on the new state pension, which would increase from £230.25 a week to £241.05 a week from April. Those retiring on the basic state pension would see their weekly income increase from £176.45 a week to £184.75.
Successive governments have committed to the triple lock since it was first introduced by George Osborne in 2010, despite criticism that protecting pensioner incomes comes with a costly price tag for the public purse and risks fuelling intergenerational inequalities.
The Office for Budget Responsibility projects that state pension costs will rise from about 5% of GDP now to about 8% by the 2070s. Half of the increase is driven by the triple lock, at a time of rising pressure on other areas of spending and social care.
The Institute for Fiscal Studies has called for the policy to be scrapped. Heidi Karjalainen, a senior research economist at the thinktank, said: “The triple lock has so far been much costlier than initially expected, and it creates a lot of uncertainty in terms of future spending.
“If the economy is doing well then it won’t cost more than increasing the state pension in line with average earnings growth, whereas in volatile periods it can become very costly – as we have seen in the last decade and a half.”
It comes as official figures showed the UK’s jobs market has continued to cool, amid a slowdown in annual pay growth and rising redundancies.
The ONS said annual growth in regular earnings excluding bonuses slowed to 4.8% in the three months to July, down from 5% in the three months to June, matching the forecasts of City economists.
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The official unemployment rate was unchanged on the previous month in July, at 4.7%, the highest level in four years.
Business groups have complained since Reeves’s first autumn budget that her £25bn increase in employer national insurance contributions and 6.7% rise in the “national living wage” would force them to cut jobs and raise prices for consumers.
Economists said there was clear evidence of the jobs market cooling. Separate figures from HMRC showed a decline in the number of workers on company payrolls of 8,000, matching City forecasts.
After taking account of inflation, annual growth in regular pay was 1.2% in the three months to July, down from 1.5%.
Reeves is widely expected to raise taxes in her autumn budget. However, business leaders have warned a weaker growth outlook will make it harder for her to raise taxes without further harming the economy.
Daisy Cooper, the Liberal Democrat Treasury spokesperson, said Labour had committed an act of “self sabotage” by pushing more people out of work. “[It has put] even more pressure on already stretched public services and leaving businesses scrambling just to keep the lights on.”
Strong wage growth has caused a headache for the Bank of England by stoking inflationary pressures, putting further interest rate cuts at risk after four reductions in the past year. However, a deeper slowdown in the jobs market could show the economy is deteriorating, supporting faster rate cuts.
The Bank is expected to keep its base rate unchanged at 4% at its next policy meeting on Thursday.
