George Osborne will use his Budget on Wednesday to announce a further squeeze on public sector spending and pay to shore up government finances and provide some money for his pet projects.
Changes to the state pension announced at the weekend will bring the exchequer a stealth windfall of almost £6bn a year from 2016-17, mostly paid by public sector employers and employees in the form of increased national insurance contributions.
By banking much of the money generated, the chancellor will be able to challenge Labour to match his tough attitude to public sector workers or face a further black hole in the public finances.
Officials have indicated Mr Osborne will bank £3.3bn, more than half the windfall, with the remaining £2.2bn used to fund projects such as the Dilnot proposals on social care and other Treasury initiatives.
Mr Osborne’s windfall will come from the small print of the plan to introduce a single-tier pension at a minimum of £144 a week in 2016-17.
The chancellor said on Sunday the new pension would be a “huge boost” for pensioners but did not add that associated changes would see steep rises in national insurance bills for employers and employees in final salary pension schemes. This was confirmed on Monday in a written statement by Lord Freud, the minister for welfare reform.
Many of these schemes, mostly in the public sector, receive a rebate from national insurance and this will be abolished when the new single-tier pension is introduced. Getting rid of the contracted-out rebate will cost public sector employers £3.5bn a year, money which the Treasury is not planning to offset with a higher total for public spending.
The move will see large employers such as the NHS and local authorities facing big cost increases and will undermine the coalition’s pledge to increase real spending on the health service every year. But because the change falls outside the 2015-16 spending review process, the exact budgets will not be negotiated until after the general election.
The Trades Union Congress responded on Tuesday, saying that the move to a single-tier pension would mean a “stealth grab across the public sector” – and could even breach the supposed ring-fence around NHS spending.
The TUC reckons that the NHs employs 27 per cent of public sector workers, suggesting an extra £900m of cost out of the total extra £3.3bn of national insurance contributions in 2016.
“The NHS – which employs more than one in four public sector workers – will need to find almost a billion pounds in extra payments. Unless the Treasury reimburses this in full, this would represent a significant cut in funding across the NHS,” said Frances O’Grady, general secretary of the TUC.
Hard-pressed local government will also have to find a similar figure of around £900m, according to the TUC.
“The Chancellor must make clear in the budget whether this windfall national insurance payment will be given back to the public sector or whether he is planning a stealth cut in not just the NHS, but across every bit of the public sector,” said O’Grady.