John Oxley: In the face of an unknowable future, policy ‘locks’ are a very bad idea

John Oxley is a consultant, writer, and broadcaster. His SubStack is Joxley Writes.

The Triple Lock is likely to be one of the enduring achievements of the Conservatives’ period in office. Introduced in 2011, it served a very real purpose, providing a mechanism for Britain’s state pension provision to catch up with peer countries.

It had also a brilliant electoral advantage: older people tended to vote Tory, and most voters like largesse directed at the ageing (as Labour have learned over Winter Fuel).

Now, though, the broader consequences are becoming clear – and highlighting the mad power of forecasting within our political system. This week, the Office for Budget Responsibility warned that the triple lock was becoming more expensive than was anticipated.

The assumptions that the triple lock was designed around have turned out to be wrong. Periods of wage volatility and high inflation have driven pensions up further than was forecast back in 2011. By the end of this decade, the measure will be costing three times more than originally forecast: an overspend of around £15 billion.

The overspend is more than just an accounting issue. It is starting to seriously distort our economic system.

The effect of the triple lock has been to tax money away from earners and spend it on an increasingly comfortable class of retirees. The median pensioner now has more disposable income than the average worker, and while some older people remain in poverty, they are far less likely to be poor than other cohorts. The pension is tipping towards being a regressive, rather than a progressive measure.

More than that, the triple lock is combining with demographic changes to make pensions a bigger part of national spending. While at present, pension spending amounts to around five per cent of GDP, it will be more than seven per cent in 2070. This will be accompanied by more health and social care spending on older people, too.

Without serious, sustained growth, this will come at the expense of higher taxes and less spending on other areas of the state. As the OBR put it, this is a “daunting” set of challenges for the future of the British economy.

Changing this is, however, politically toxic. Pensions are virtually sacrosanct expenditure. This is partly because older people are the most likely to vote, but also because younger voters like spending money on them, and anticipate the same largesse in their old age. At the last election, there was no question of abolishing the triple lock. The Conservatives were actually planning to strengthen it, if re-elected, by exempting it from income tax.

There is an element of unreality here. Our political culture on the left and right was built up when Britain sat in what economists call the “demographic sweet spot”, with a glut of workers and a lack of dependents. Depending on your perspective, that could provide either for a generous state or lower taxes.

Now, we have tipped into the other side of that spectrum, and few in our political class accept the realities of what that means.

Instead of grasping this nettle, fiscal control has started to be outsourced to the OBR itself. Much like the triple lock, this was a Conservative invention designed to give us an electoral advantage – but has now grown to so much more. Their forecasts have been used to hem in political decision-making. Though the body has no real power, its influence is huge, and its forecasts have gained a majesty they ill-deserve. Its projections are taken as the byword for fiscal probity, and disregarding them is seen as hubris.

Yet as the triple-lock shows, they are often badly wrong. Now, this is not the fault of the economists. Prediction, as they say, is a difficult job – especially about the future. Looking at the British economy over a decade or two involves piling assumptions on top of assumptions. The margin of error is huge, before you even start to think about the low-probability, high-impact events that could throw it off further. The Treasury bods of 2011 cannot be blamed for failing to see that two of those, a pandemic and a war in Europe, would crop up. Our politicians can and should, however, bear criticism for elevating the forecast despite its uncertainties.

The OBR has become an awkward tool for politicians. It has routinely overestimated the chances of long-term growth, and like the triple-lock, failed to anticipate some rising costs. Yet time and again, politicians have shaped their decisions around it, according it a reverence and a precision it is impossible for it to bear out. With Labour strengthening the fiscal rules, this has further elevated the body, yet the underlying problem has remained the same.

Our country has failed to achieve the growth it should have. While doing so, it has continued to stack up spending commitments. Many of the latter have been popular, while some of them have impeded the former. Ultimately, this is a political problem, not a technical one. Whatever the OBR forecasts, we are stuck with a reality that voters are expecting things we can ill-afford on current fundamentals.

The triple lock is perhaps the most egregious example of this. It has taken a change that was necessary at the time and embedded it to the point of absurdity. Despite the rising cost projections, there is little political will to challenge it, for fear of the electoral consequences. This highlights the absurdity of flapping about the short-term forecasting of the OBR while ignoring where it is heading on a longer timescale, and hoping that predicted growth – that has never yet materialised – will save us from the trap of future spending commitments.

This new report shows the problems of exaggerating the power of the OBR. When it is wrong, as it often is, decisions have already been made, and they become harder to retract. But not only is it politicians that make those decisions, but it is they who time and again choose to treat the OBR’s forecasts (which tend, remember, to be over-optimistic) as gospel.

The triple lock has mostly served its purpose of getting pensions back to European levels, but at a far greater cost than first anticipated. Yet now it is politically entrenched and will be a devil to remove – not because of the OBR, but because of politicians.

It serves as a warning. Politicians should be more mindful of the variability that can come up and less beholden to mathematical exercises. These things can, and will, be wrong, and it is essential to understand where that leaves us.

You don’t need a precise model to show that stagnant growth and rising costs will have serious fiscal consequences. You need the political will to change the circumstances that drive that. As the triple lock shows, that is often hard to find.