Thread by @julianHjessop

A 🧵on #benefits…

#KwasiKwarteng’s reluctance to confirm that benefits will be uprated in line with #inflation has fed speculation that the government is considering a real-terms cut.

I’m going to explore this further, but at first sight it looks like a very bad idea...

To recap, benefits are usually uprated in April in line with the CPI measure of inflation recorded in the previous September. This meant that benefits rose by just 3.1% in April this year (the inflation rate in September 2021), well below actual inflation of 9.0% in April itself.

The row about this at the time was partly defused by additional one-off payments to low-income households.

But Ministers also argued that benefit claimants could expect to catch up next year when payments were uprated in line with the September CPI (probably about 10%).

There seem to be three arguments in support of a U-turn now.

In my view, the weakest is that it would be ‘unfair’ for people on benefits to be protected against inflation when many others (who pay for benefits through their taxes) are seeing a real-terms cut in their incomes.

This argument might work if we were talking about pay increases for, say, people working in the public sector who already earn more than the average.

But those who rely on benefits are, by definition, poorer than the average. It makes no sense to penalise them.

A better argument is that benefit claimants are already being compensated for higher inflation in other ways, including the additional cost-of-living support and discounts on energy bills.

Raising benefits by the full amount of inflation too would therefore be ‘double counting’.

This makes more sense. These transfer payments are not reflected in the official measure of inflation because (unlike the #energypricecap) they do not reduce the unit cost of energy. But it is still hard to see how the benefits uprating could be adjusted to allow for this fairly.

In particular, this would open up a whole new can of worms.

If you argue that the additional cost-of-living support means that ‘real’ inflation for benefit claimants is lower than the average rate, others will point out that inflation is typically higher for poorer households.

One option might be some measure of CPI #inflation excluding energy, but this is still likely to be around 7-8% in September (meaning only a small saving for the Treasury compared with uprating at c10%).

Another would be average earnings, perhaps 6%.

The third argument is that there is a precedent – the temporary unpicking of the triple-lock on the state pension, which was also only increased this year by the September 2021 inflation rate of 3.1% rather than the (then higher) increase in average earnings.

But this is not a strong precedent. It was much easier to argue that the average earnings measure was distorted by the pandemic and that uprating in line with inflation instead was fair. Here, we are talking about a real-terms cut in benefits.

This also opens another can of worms. If you argue that working-age benefits shouldn’t be increased by the full amount of inflation, why should that not also apply to pensions (especially as the basic state pension is not means-tested)?

The political risks are obvious. It is hard to think of anything more toxic than cutting the real value of benefits at the same time as lowering the top rate of income tax to 40p. The optics of a real-terms cut in benefits but not in pensions could be dreadful too.

Indeed, there is a clear danger that the old Treasury orthodoxy is reasserting itself here.

A narrative is already developing that there needs to be big and immediate cuts in public spending in order to pay for big cuts in taxes, which would simply undermine the growth agenda.

In short, the government should be willing to make unpopular decisions, but the economic case for failing to uprate benefits in line with inflation appears to be flimsy.

Politically, it seems like madness.