The equalisation of male and female pension ages, due to be announced this week, will be followed by a large pensions bill next year, as people are encouraged to opt out of the state old age pension.
The move will be unpopular with women, who currently have the right to retire at 60, but fits in with government attempts to reduce welfare spending. Harmonisation of retirement age is required under European law. Peter Lilley, Secretary of State for Social Security, plans to phase in the reform, which could bring eventual savings of pounds 3bn.
Extending the right to opt out of the State Earnings Related Pension is expected to form part of a Bill in the next session of Parliament. This legislation will also include tidying up measures to protect pension schemes which were recommended in the Goode report.
Reforms to the state pension system are unlikely to generate large amounts of revenue for some years. But the Chancellor in his Budget on Tuesday will announce other changes to the social security system with an earlier impact.
Unemployment benefit, to be renamed 'Jobseekers' Benefit', is expected to expire after six months rather than a year as at present. Claimants will then have to move on to means-tested income support, cutting the cost of benefits and reducing the unemployment count.
The Chancellor will argue that the benefit changes will be partly offset by cuts in employers' national insurance contributions, which will make it cheaper for companies to take on workers. The cut in employers' NICs is a quid pro quo for their shouldering the pounds 1.4bn cost of statutory sick pay and industrial injuries payments.
Regulations for invalidity benefit, which has seen a dramatic rise in take-up since the early 1980s, will also be tightened. Training and Enterprise Councils will also face cuts in budgets as part of a disappointing spending settlement for the Department of Employment.
The City is expecting the Chancellor to raise between pounds 2bn and pounds 3bn in total, largely through tax changes but any big extentions of VAT or direct tax would provoke anger on the Conservative backbenches. Most analysts expect Mr Clarke to announce a symbolic cut in public spending below the totals set by the Cabinet in July. The Chancellor has leeway to cut the spending total because low inflation means the same amount of services can be bought with less cash, while the pounds 7bn contingency reserve could also be cut without increasing departmental spending.
The most widely expected 'big idea' for the Budget is to establish 20 per cent as the basic rate of income tax. This could be done by widening the 20 per cent tax band, paid for by cutting the value of allowances - the slice of income on which tax does not have to be paid - for middle and higher earners.
Business, page 5