Ditch the state pension triple lock and consider scrapping some VAT exemptions to raise more for Government spending, an influential economic think tank has suggested.
The Organisation of Economic Co-operation and Development (OECD) said the Government should keep up momentum on policy reforms to help improve living standards and the performance of the economy.
One recommendation is to reform the pensions promise, which guarantees the UK’s state pension rises each year by whichever is highest out of inflation, wage growth or 2.5%.
It said the measure is “unusually generous” compared to other countries.
The Paris-based organisation said in a report: “The triple lock indexation of state pensions puts upward pressure on public expenditure and adds significant fiscal risks by exposing public finances to supply shocks, thus requiring a timely reform that overcomes political economy constraints.
“Given political economy challenges and the existing commitment to the triple-lock guarantee over the current Parliament, the Government’s effort should focus on setting the ground for lasting reform.”
This should go hand-in-hand with explaining how a new approach to state pension will be effective and fair to ensure reforms are publicly accepted, the OECD said.
It echoes similar calls by the Office for Budget Responsibility (OBR) last week, which warned the triple lock is a “substantial pressure on public spending” over the longer term.
It estimates the measure will have added about £15.5 billion to state pension spending each year by 2029-30 – up from the £5.2 billion a year that was originally costed.
Speaking at a launch event for the report, pensions minister Torsten Bell said: “The Government’s manifesto commitment is to the triple lock throughout this parliament, and that is going to happen.”
But he said the Government is focused on reforming the private pensions system to get more people saving for the future.
Meanwhile, the OECD said there is scope to review the current tax system and potentially eliminate some VAT exemptions in order to raise more money for Government spending.
“If raising tax becomes a last-resort necessity”, then “raising VAT seems the most prudent option”, the report read.
But further raising national insurance contributions should be avoided given recent hikes have already pushed up labour costs, according to the think tank.
Mr Bell said: “Right now is a good time to reform the private pensions system, and that’s exactly what we’re doing.
“It’s not a good time to raise VAT when you’ve just been through a cost-of-living crisis and the Bank of England is trying to sustainably bring inflation to target.”
Addressing questions on the impact of recent tax rises, he said: “I’m not hiding from the fact that there are consequences from the change in national insurance, the Chancellor has been very clear about that,” but he said the tax system is supporting investment and functioning public services.
“Making sure we rescue our public services is a pro-growth choice,” he stressed.
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