Slipping behind: with benefit reform, keep an eye on the index

Historians generally agree that cutting back public spending is difficult in a modern democracy.  Losers shout louder than winners; the most expensive programmes are generally the ones with the most interests behind them; radical cuts are more likely to provoke strong reactions.  (Similar objections apply to tax rises, of course.)  The current cuts are striking, not just in their sheer unprecedented scale, but in the extent to which they cut back on services on which a lot of people rely in a very visible way.

So governments have always tended to fiddle with the small print of tax and spending rules – it’s hard to twig exactly what’s going on, the consequences aren’t immediately clear and by the time the full impact is clear the deed will already be done.  Freezing the basic-rate limit (or, in days gone by, the personal allowance) for income tax is a classic example.  So, too, with changing the rules for calculating benefit increases.

Of course, the Government’s already played this game.  Nearly £6bn of its £18bn of planned welfare savings come from changing the measure of inflation used in uprating benefits from RPI/the Rossi Index, depending on the benefit, to CPI (see p40 of the Emergency Budget).  This is simply because small changes, repeated each year, add up.  If you look at the chart here, the impact over a long period becomes very clear.  Whether Gordon Brown specialised in stealth taxes or not, George Osborne certainly has a fondness for stealth cuts.

The exception to the rule is the Coalition’s ‘triple guarantee’ on state pensions, guaranteeing annual increases of the highest of an increase in earnings, prices or 2%.  Of course, this will start undoing the work of the last Conservative Government, when it broke the link between pensions and earnings.  The (clearly documented) consequence was that the basic state pension fell further and further as a share of earnings – from 20% in 1978 to under 15% by 1998; it has carried on falling ever since.  That trend will now reverse over time; but note how differently a large, vocal, Conservative-inclined group is being treated from people on low incomes, with disabilities or in need of housing.

We need to spell it out: the decision to uprate benefits by CPI rather than RPI is a straightforward decision to make the very poorest people in Britain poorer.  It hits people on Income Support, on Jobseeker’s Allowance, on Incapacity Benefit or ESA.  As the Government are even cutting the link between Local Housing Allowance and rent levels, it will drive more and more people out of their homes: eventually, given long enough, it will make people out and out homeless.  (This holds even if we ignore the effect of all the other LHA cuts.)  The single biggest policy change, fiscally speaking, in the Emergency Budget and the Spending Review combined is a plain and simple cut to the incomes of Britain’s most disadvantaged inhabitants – one which will be repeated every year, until it changes.

That’s quite bad enough as it is, and it makes the Government’s claim that it’s determined “not [to] balance the books on the backs of the poor” look pretty hollow already.  This September, the difference between CPI (5.2%) and RPI (5.6%) was fairly small, but the long-term effect will be dramatic.  So for the Government to even consider ways of reducing the annual rise again, even for one year only, is a particularly nasty attack on the living standards of a lot of very vulnerable people.  The reason inflation is high is that the cost of living is going up: a lot of that is to do with global food prices, which (as a relatively fixed cost) will bear especially hard on the poorest.  When the IFS says that £1.4bn (out of £1.8bn) could be saved by averaging out six months’ worth of inflation figures, they mean that most of a badly needed boost to incomes for the very poorest people in the country could be removed.

If the Government want to argue that that’s justified, then I’d disagree, but it’s a point for debate.  But they cannot then claim that they’re not “balancing the books on the backs of the poor”.  As a matter of cold, hard, statistical fact – whether they go ahead with this one-off change or not – they already are.

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