COMMENT

WHEN the Chancellor sets the rate of the state pension each year, he cannot simply pluck a number from the air. There are two things which limit his room for manoeuvre.

The first is the law of the land which requires an annual increase in the state pension at least in line with the growth in average earnings. The second is the Conservative manifesto commitment to the triple lock policy.

This requires him to increase the pension in line with the best of three numbers – the increase in earnings, increase in prices or a floor of 2.5 per cent.

The reason there is currently such interest in this topic is that the earnings figures which are now being published are showing unusually high growth rates.

A year ago, millions of workers were being put on furlough and seeing their wages cut to 80 per cent of their normal rate.

Some of those workers have since lost their jobs, but many more are now back at work at their normal wage. This means that earnings have surged this year.

This slump and surge in wages creates a real headache for the Chancellor. Every one per cent on the basic and new state pension adds around £850m to the pensions bill.

If he was budgeting for a 2.5 per cent increase in line with the triple lock but ends up paying 5.6 per cent (the latest earnings growth figure) he will have to find an extra £2.6billion.

And if the final earnings growth figures are higher, we could be talking about finding an unexpected £4billion and increasing the new flat-rate pension by £10 per week.

With pressure to find money for the NHS, social care and schools, while reducing government borrowing, the Chancellor will undoubtedly be looking for alternatives to a big pension hike.

The most likely approach would be to “fudge” the earnings figures to try to smooth out the artificial peaks and troughs of recent years. He could do this by averaging wages over two years or by coming up with some sort of “underlying” wage growth figure.

But anything more than this, such as a one year squeeze on pensions, would be totally unacceptable.