A seemingly technical change to the way benefit increases are worked out in today’s budget will short-change hundreds of thousands of people on benefits over the coming years.
The Chancellor announced that, from April 2011, the Government will change the measure it uses when uprating benefits (and public service pensions) – switching to the Consumer Price Index, (CPI).
At present, most benefits are raised in line with the Retail Prices Index (RPI); means-tested benefits are uprated by the “Rossi” index, which excludes housing costs. (I blogged a few days ago on the history of changes to benefit uprating.)
The RPI includes changes in mortgage interest payments, council tax and some other housing costs which are not included in the CPI. The CPI includes changes in the price of some financial services that are not covered by RPI.
Some time ago, the government switched to using the CPI for inflation targeting, and this is one of the reasons given by the Budget Report for changing the measure used for benefits uprating. The Chancellor also indicated a more important reason – the CPI will usually produce smaller benefit increases. In his speech, the Mr Osborne said that he expected this change to reduce the amount spent on benefits by £6 billion a year by the end of this Parliament.
The chart below shows ten years of annual rates for the CPI and RPI:
As you can see, the CPI normally produces a lower figure than the RPI. The only exception is when mortgage interest rates are coming down – during such a period, the RPI reflects the fact that each month’s interest rate is lower than it was a year previously. In the early months of the recession, as the Bank lowered interest rates, we had one of the few periods when the CPI produced higher figures – and benefits were raised by RPI.
Now, with interest rates at historically low levels, they can only go up, and the RPI has already overtaken the CPI again.