Today’s Daily Telegraph reports that George Osborne is close to winning agreement that benefits – including “child benefits, disability benefits, housing benefit and unemployment benefit” [Jobseeker’s Allowance] – will be frozen for at least a year in the emergency Budget. The freeze, estimated at saving £4.4 billion, will help pay for an amendment to the Capital Gains Tax proposals, to “ensure that ordinary savers who may have bought a second home as an investment for retirement are not treated in the same way as the real targets of the rise, wealthy financiers who use CGT to avoid paying full rates of income tax.”
Before the high inflation rates of the 1970s, benefits were raised on an ad hoc basis, the net effect of which was roughly to keep benefit increases in line with increases in earnings. For a short while under the Callaghan government we had the gold standard for uprating policy – the ‘Rooker-Wise’ amendment, which forced the government to increase benefits and tax allowances in line with increases in prices or earnings, whichever was higher. One of Mrs Thatcher’s first actions on winning power was to restrict uprating to the level of inflation, in 1980 the uprating of some short-term benefits was ‘abated’ by 5 per cent and Child Benefit was frozen for several years in the late 1980s.
Current practice is that most benefit rates are uprated each year in line with inflation, as measured by the Retail Prices Index (RPI). Means-tested benefits are uprated by a special measure, the Rossi index, which is similar to RPI-X, because it excludes housing costs. As a result of changes by the last government, a few benefit rates, including the Guarantee Credit for pensioners and Child Tax Credit child rates are increased in line with the Average Earnings Index.
At present, the Retail Price Index and RPI-X both stand at 5.1 per cent, so a freeze will mean an equivalent cut in the living standards of people who rely on benefits normally uprated by this amount.
There has been a great deal of speculation that the Budget would cut benefits for middle-income families, but a benefit freeze would hit the poorest even harder. As I have previously noted, benefits for unemployed people have, for 30 years, been steadily falling relative wages. A policy of uprating benefits in line with prices, not wages, inevitably means that people who rely on benefits fall further and further behind the living standards of the rest of society. As they tend to be the poorest and most vulnerable, such a policy – with equal inevitability – leads to an increase in poverty and inequality.
Current uprating policy for most benefits leads to creeping inequality. Benefit freezes speed up the whole process.
“Who made the poorest poorer? Who left youth unemployment higher? Who made inequality greater? No, not the wicked Tories… you, Labour: you’re the ones that did this to our society. So don’t you dare lecture us about poverty. You have failed and it falls to us, the modern Conservative Party to fight for the poorest who you have let down.”
David Cameron, Conservative Party Conference, 8 October 2009.