Wednesday, 21 October 2009

Facing up to hard choices

Talking the talk is one thing but walking the walk is another. For all the talk of facing up to hard choices, politicians are shirking chances to reduce public expenditure. Pensions and other benefits are going up by 2.5 per cent next spring. The Financial Times estimates this will make state pensioners 4 per cent better off given that there is a negative RPI.

The 'inflation rate or 2.5 per cent whichever is higher' rule was introduced in 2000 when there was a political storm when New Labour increased pensions by only 75p. The public finances were in a healthier state then, whilst holding back the increase now would save a substantial £5bn. But no party wants to be seen squeezing pensioners, a sizeable slice of the electorate with a high propensity to vote, in the run up to a general election.

Now the influential NIESR has pitched in with an argument that the retirement age should be raised to 70 by 2015: Retirement . The NIESR said that the structural budget deficit was running at an unsustainable level of 6 per cent of GDP.

The alternative to a pension age rise was freezing public sector pay for five years whilst losing 120,000 jobs a year for the same period; a 7p increase in basic tax rates; and an expansion in the VAT base to include everything but food and children's clothing.

The Office for National Statistics has reported that government borrowing rose to £77.3bn in the first six months of the financial year - more than double the debt racked up in the same period last year - as tax revenues tumbled by 10 per cent.

Such a sharp and sudden increase in the pension age would not be politically feasible. But then some hard choices are going to have to be made. At some point the phoney war on public expenditure will come to an end.

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