Over recent weeks, a fierce debate has been raging at the centre of government over the rate at which benefits will be increased next year. The original plan was to increase benefits by whatever the rate of inflation, measured by the CPI, was in September this year.
The reason the issue has been so heavily debated is because the CPI rate of inflation in September was one of the highest of recent times: 5.2%. That was a higher rate than the Treasury had factored into their plans.
More importantly, though, George Osborne – for political reasons – was reluctant to increase benefits at the rate of inflation when average earnings were rising by much less – somewhere around the 2% mark.
Lib Dems in government where keen to see an inflation-level rise, as planned.
Hence this intervention, a couple of weeks ago, by David Laws in a letter to the deputy prime minister and reported in the FT:
Mr Clegg has been advised by David Laws, former Treasury chief secretary, that the coalition should stick with plans to increase all benefits next year by 5.2 per cent – in line with September’s inflation figure – to protect “some of the poorest in society”.
Mr Laws, considered a fiscal hawk, argues in a letter to Mr Clegg that people on benefits were already under severe pressure from inflation and points out that benefits – including child benefit, council tax and housing benefit – have already been squeezed.
Skip forward a week, and Vince Cable is asked about the issue on last week’s Politics Show, and answers thus:
Of course they will go up with inflation. We believe the most vulnerable people in society should be protected in these very difficult conditions.
There is no doubt; of course they should be indexed and that’s fully understood.
Then yesterday comes the report – in The Times and the Guardian – that a compromise has supposedly been reached which will maintain the index link but which will use as a measure a six-month average of inflation figures rather than the one off (and particularly high) September figure. That reports suggest that that figure is 4.5%.
The Guardian suggests that this compromise has not yet been approved by the ‘quad’ (David Cameron, Nick Clegg, George Osborne and Danny Alexander), but it looks like the 4.5% rise is will go ahead.
In my view this is a significant victory for Lib Dems in government. Inflation over the next year or so is likely to be lower rather than higher, so a 4.5% rise will still leave those on benefits better off.
It’s also worth pointing out Labour’s view on all this. The FT reported that Labour were reluctant to criticise a lower increase (even a wage-level increase) because they fear it would alienate low-paid workers, who they believe they need to get back on their side.
In other words, the only political party arguing for the retention of the index link was the Liberal Democrats – and it looks like we have thankfully succeeded.
I am not a mathematician, but it seems to me that this “averaging” is rather suspect.
A further thought: if Osborne is frightened by the rate of inflation, he ought to encourage the Bank of England to reverse its policy of quantitative easing.
But surely this is not joined up with the party’s aim to reduce poverty, and notably child poverty which is a legal commitment?
The IFS reckon that the switch from RPI to CPI is a significant factor in making adding to child poverty. Another concern is that inflation for those on low incomes is higher than for everyone else because they spend a higher proportion of their income on fuel and food.
The best policy is surely to measure inflation for the relevant income group and base policy on that? We are of course a long way from doing that.
Well, there are lots of changes that one might potentially make to the system, but we have to consider these things in the context in which these decisions are made. We are the junior partners in the coalition, and we succeeded in moderating substantially a rather extreme Tory policy.
The averaging doesn’t make sense (think how many employers do that? None I’ve had). The inflation rate is a change over 12 months, it’s not just that month (there is of course a monthly change as well). You can’t average annual rates.
The most accurate way would be to update it with March’s inflation rate, but it’s correct to use a single figure.
I support government giving increase 4.5% for Benefits.
The government must keep its promise on state pensions.
The rate of inflation in high because of high oil prices
and price of Gold on the Markets..
What utter nonsense.
If we are trying to get people back to work although accept difficult at present ( 5 million plus of working age not working in UK, 1 million plus 18/24 year olds etc) how can it be justified to increase benefits, at the expense of those in work ,inline with inflation but all else doesn’t e.g. any public sector worker pay increase pegged at 1% after two years freeze. No change there then, no incentive to try and get a job. Oh the folly of creating this super welfare state where most of the few new jobs also fall to foreign workers. How can this financial strain be sustainable. Lib Dems have got it wrong yet again. I thought the idea was to get Britain working again!!!!!!!!!!!!!!!!!!!!!!!!
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