From the TUC

RIP RPI: Budget changes to benefit uprating

22 Jun 2010, by in Society & Welfare

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.

8 Responses to RIP RPI: Budget changes to benefit uprating

  1. VAT and the poorest | ToUChstone blog: A public policy blog from the TUC
    Jun 22nd 2010, 3:44 pm

    […] Osborne gave no hint that the government plans to do this. In fact, as I’ve mentioned elsewhere today, the government plans to switch to an uprating system that will make sure that […]

  2. The practical difference between RPI and CPI for benefits | ToUChstone blog: A public policy blog from the TUC
    Jun 22nd 2010, 7:33 pm

    […] has already blogged about the impact of ditching RPI as the measure for indexing […]

  3. Crash! Bang! Wallop! The Chancellor wastes no time at all cutting benefits and tax credits! IncomeMAX comment on the Emergency Budget | Income Max | The Entitlement & Benefit Experts
    Jun 22nd 2010, 10:07 pm

    […] Exell, the TUC’s Senior Policy Officer has written a very interesting blog on the subject of using CPI to uprate benefits, and so has his colleague Nigel Stanley, the TUC’s […]

  4. CPI, RPI and public sector pensions | ToUChstone blog: A public policy blog from the TUC
    Jun 23rd 2010, 6:39 pm

    […] the news that in future public service pensions in payment will be linked to CPI rather than RPI. Richard and I blogged about what this means yesterday. (And thanks to commenter Paul for pointing this out […]

  5. Benefits leave people in poverty and government policy will make this worse | ToUChstone blog: A public policy blog from the TUC
    Jul 7th 2010, 10:54 pm

    […] Coalition’s new policy on uprating will make things even worse. Nigel and I have blogged about how the change to CPI for uprating benefits will lead to lower benefits, more […]

  6. The paradoxical stability of welfare expenditure (and why we should be spending more) | Left Foot Forward
    Jul 10th 2010, 10:01 am

    […] of payments to those without children – and they are going to get stingier as the shift to CPI uprating kicks […]

  7. ONS downgrades the Retail Price Index | ToUChstone blog: A public policy blog from the TUC
    Jul 13th 2010, 1:36 pm

    […] Nigel, Bryn Davies and I have been reporting, uprating benefits and tax credits by CPI will reduce their value and public […]

  8. Cuts in the value of benefits | ToUChstone blog: A public policy blog from the TUC
    Jul 29th 2010, 12:56 pm

    […] for the poorest mothers and for disabled people) the Budget announced changes in the mechanism for benefit uprating. A quick analysis, using the CPI and RPI forecasts provided by the Office for Budget […]