Public-sector workers must retire later. It’s the fairest way to cut the deficitby Tim Leunig / June 22, 2010 / Leave a comment
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The first set of figures released by George Osborne’s new office for budget responsibility on 14th June made grim reading. Government borrowing was down ever so slightly, but so were growth forecasts. So when the chancellor stood up to present his “emergency budget” on 22nd June, he had to offer comprehensive ways to cut spending without further damaging the fragile economic recovery. As Martin Wolf has persuasively argued, “bad cuts” risk not simply a double-dip recession, but a Japanese-style lost decade.
Osborne needs to save a decent amount of money: we are hugely in debt and must pay back enough of it so that the economy can be bailed out next time it crashes. (There will be a next time, after all—capitalist economies are like that.) But the cuts also need to be fair; and they need to credibly reduce the deficit in the future without taking money out of the economy now.
There were plenty of “brave” cuts on the table for the first budget. Freezing public-sector pay was one of them—but history tells us that it catches up again in a few years’ time and so lacks credibility as a long-term measure. Cutting benefits was another—but as Peter Lilley used to remark, to save even £1bn you have to make 1m families £1,000 a year worse off. Raising VAT was there too, but since the VAT reduction that ended in January did boost spending, a VAT rise now risks pushing us into recession once more.
Of all the options Osborne faced on 22nd June, by far the best was to change the rules governing public-sector pensions so that all public-sector workers would get their pensions at 65, not at 60. This is commonplace in the private sector, and has already happened for people joining the civil service. But it should be extended to all existing public employees except the military. Alan Johnson considered this when he was secretary of state for work and pensions, but backed away. Now is the time to be brave. Thanks in part to baby boomers retiring and large pay rises for senior civil servants under Labour, spending on public-sector pensions is forecast to double in the next four years—from £4bn a year in 2010-11 to £9bn a year by 2014-15. Nick Clegg said in mid-June that this was “not affordable” and announced a…