Westminster Blog

You could be forgiven a sense of déjà vu on reading that the coalition may freeze benefits and/or change the way they are uprated: we have been here before.

Most recently, in June, David Cameron said in a speech about benefits (at the Bluewater shopping centre in Kent) that something had to give on inflation-linked benefit increases.

Next, we need a debate about the limits of state provision. There are national questions we have to ask. This year we increased benefits by 5.2 per cent. That was in line with the inflation rate last September. But it was almost twice as much as the average wage increase.

Given that so many working people are struggling to make ends meet we have to ask whether this is the right approach. It might be better to link benefits to prices unless wages have slowed – in which case they could be linked to wages.

Long before that speech, the FT revealed a year ago that:

“George Osborne is looking at options to cut billions of pounds from next year’s benefits bill by scrapping inflation-linked rises, in a move that could trigger a fierce cabinet clash.

The chancellor is alarmed at the political and economic difficulties presented by the fact that benefits and pensions next year would rise by 5.2 per cent, in line with the bumper inflation figure for September, the base month for the calculation.

The FT has learnt that Mr Osborne has asked officials to provide models for a range of alternatives models, including raising benefits in line with average earnings growth of about 2.5 per cent or even freezing some payments altogether.

Iain Duncan Smith, work and pensions secretary, is said to be highly concerned….”

In the end Cameron was thwarted by Nick Clegg, who insisted that benefits should go up by the full amount.

The final compromise was revealed in the FT by Kiran Stacey: the Lib Dems judged that it was better for tax credits (ie hard-working low income families) to be hit rather than benefits – a decision that defied the conventional political wisdom.

“A £1bn jobs fund that aims to get a grip on soaring youth unemployment is to be announced by Nick Clegg this week, partly funded by a squeeze on tax credits paid to poorer workers. The deal is a compromise thrashed out between Conservative and Liberal Democrat ministers. Mr Clegg will unveil a scheme on Friday to help companies pay for short job placements for young people, intended to address fears that the economic crisis will create a “wasted generation”.

Some money for the scheme is expected to be released from a below-inflation rise in some tax credits, after Liberal Democrat ministers succeeded in arguing against a freeze in benefits. Mr Clegg insisted that all benefits, including pensions and out-of-work payments, should rise by 5.2 per cent, a figure based on September’s inflation figure, which many regard to be at the top of the cycle. The deal will come as a surprise at Westminster, where even Labour had signalled it would not oppose a lower rise in benefits.”

It’s no surprise that the issue has reared its head again, with the uprating decision due in December. The question is whether the Lib Dems will once again block a freeze in benefits (or shift in uprating from CPI inflation to earnings) or this time let it through – the latter seems likely given the worsening in the fiscal situation.

But would a shift to an earnings-link uplift would mean that benefits would go up even more slowly?

In July CPI was 2.6 per cent and RPI was 3.2 per cent: earnings growth was just 1.5 per cent (in part due to the freeze in public sector pay). Hat-tip Theo Boggis.

Yet you don’t have to go back far to see years when earnings were actually outstripping inflation. In the long-term that is usually the case: explaining why people’s standard of living has improved so markedly over the last half a century.

The Office for Budget Responsibility has long-term predictions of earnings growth at 4 per cent against inflation of just 2 per cent. In which case, the government could of course change the goal-posts in the future; but not without more political pain.