George Osborne has decided that benefits will be up-rated at 1% for the next three years. Previously, they would have been uprated in line with the CPI. This is itself a Coalition-introduced decrease from uprating in line with the RPI.
Uprating in line with the CPI has no merit or justification, other than that it saves the government some money.
Osborne’s justification for the 1% is that without it, benefits increase at a higher rate than wages. It is therefore ‘unfair’ to allow benefits to rise at a higher rate than 1% (which is a real-term cut, as inflation is at 2.5%).
However:
out-of-work benefits have fallen relative to average earnings over the last thirty years, from 22% of average earnings to 15%. This is a relative decline of about 1/3
wages tend to rise faster than prices during good times, and rise slower than prices in bad times. This means that overall, benefits have not risen in line with prices whilst wages have risen more than prices.
the overall policy means that benefits are rising at whatever is the lowest rate, even though this means benefits do not keep in line with prices or the income necessary for subsistence, and overall benefits do not rise as fast as wages.
it ignores the fact that any short-term conditions in which benefits rise faster than wages still keeps benefits below wages in the long-term; the effect of the recession is a temporary trend towards greater equity in the benefits vs wages increase, but it does not override the long-term trend that is in favour of wages.
Osborne said that this 1% limit on uprating would not apply to pensioners or to the disabled. However:
the disabled benefits referred to considers only Disability Living Allowance.
there is no mention of how Personal Independence Payments will be affected, although it is to be hoped that as their purpose is the same as DLA they will be treated by the government in the same way.
Employment and Support Allowance has not been included. This is a deeply worrying decision. Much political focus for ESA has been to move it nearer to Jobseeker’s Allowance, in terms of the conditionality, expected work-related activity and sanctions. The overall picture is one of a government that is increasingly seeing ESA as a short-term benefit only, as people are expected to recover relatively quickly and return to work. Unfortunately this massively overlooks the many people who are chronically ill or disabled for years, not months.
Indexing benefits to inflation is not ‘unsustainable.’