Tuesday, 11 December 2012

Benefits uprating and living standards

Discussion piece by Professor Jonathan Bradshaw *

The decision of the Coalition Government, announced in the Autumn Statement, to uprate most social security benefits and tax credits by 1% per year for the next three years is unprecedented* . It will save £3.8 billion, which is the same as saying that the poorest families will have that amount taken from their incomes. The impact on their living standards will be much starker.
The Consumer Price Index (CPI) is running at 2.8% for 2012 and the Office of Budget Responsibility*  expect that the level of inflation will be over 2% for at least the next three years. However the movement in average prices is not that relevant to low income households because they tend to spend a larger proportion of their budgets on commodities (food, fuel, water) whose prices have been increasing faster, than general inflation* . Thus the Retail Price Index and the Consumer Price Index both underestimate the inflation experienced by people with low incomes receiving benefits*. The real incomes of the poorest are going to fall as a deliberate act of policy. This has not happened since 1931 when it resulted in the collapse of the first Labour Government.

The post war legislation that implemented the Beveridge plan laid down no provision for uprating benefits. But they were uprated, initially on an ad hoc basis. In 1974 it was decided to link so called ‘long-term benefits’ such as pensions and long-term sick and disabled benefits to the higher of the two annual increases as measured by the Retail Prices Index (RPI) and the Average Earnings Index.  The Thatcher government broke that link in 1979 – by linking long-term benefits to the prices index only. In 1983 they introduced the ROSSI index (RPI (All Items) less housing costs) to uprate income-related benefits. In 1992 the definition of ROSSI changed to New ROSSI.  New ROSSI is calculated as RPI (All Items) less rent, local taxes and mortgage interest payments. Since 1983, benefits have been increased in relation to the RPI, ROSSI or New ROSSI.  The actual increase in particular benefits has depended on the index applied and on policy decisions as to the appropriate rate for the benefit. In the 2010 budget the Chancellor announced that from April 2011 most DWP administered benefits would be uprated in line with the CPI. Also, the Government introduced legislation providing for earnings up-rating of the basic State Pension, and in addition, provided a triple guarantee that the basic State Pension will increase by the highest of the growth in average earnings, price increases or 2.5%

Between 1948 and 1979 the basic retirement pension doubled its value in real terms and maintained its value in comparison with average earnings. Under the Thatcher government the basic state pension declined in value in relation to earnings, until the Labour Government rescued it and linked it to movements in earnings from 2001. Over the whole period since 1948 it more than doubled in real terms. It will go up by 2.5% in April 2013 well ahead of earnings and just about maintain its value with average prices. (See Table 1)

Table 1: Single Basic State Pension at April 2011 prices and as a percentage of average earnings
Source: http://research.dwp.gov.uk/asd/asd1/abstract/abstract2011.pdf

Contrast that with what has happened to the benefit for the unemployed. Between 1948 and 1979 it also doubled in value in real terms. But since 1980 there has been a sustained fall in comparison with earnings and even under the Labour Government the real level of unemployment benefit fell (See Table 2).

Table 2: Single Unemployment Benefit / Jobseeker's Allowance (contributory) at April 2011 prices and as a percentage of Average Earnings
Source: http://research.dwp.gov.uk/asd/asd1/abstract/abstract2011.pdf

The improvements that the Labour Government made to out of work benefits were concentrated on families with children. Table 3 shows what has happened to the incomes of a lone parent with one child on social assistance. The first act of the Labour Government in 1997 was to cut lone parent benefits, but the outcry resulted in a sustained improvement in real terms and as a proportion of average earnings.

Table 3: Income support for a lone parent plus one child at April 2011 prices and as a percentage of average earnings
Source: http://research.dwp.gov.uk/asd/asd1/abstract/abstract2011.pdf

The decision to uprate pensions by 2.5% and working age benefits by 1% for three years is going to further exacerbate the absurd differentials in benefit rates that have developed over time. In 1948 a single pensioner received only 10p more than a single person on national assistance. Now a single person receives £71 per week in Job Seeker’s Allowance until they are eligible for Pension Credit when it jumps to £142.70 per week. A lone mother with one child gets £133.21 per week. These differentials clearly have nothing to do with need.

The decision to uprate benefits by less than inflation is justified by the argument that earnings are falling in real terms. Yes, and this meant that for the first time for decades there was some closing of the gap between the living standards of the unemployed and working households. In 1948 the single rate of social assistance was 18% of average earnings and it reached 20% in the late 1960s. In 2011 it had fallen 11% of average earnings.

Figure 4 compares movements in the CPI, RPI, the Minimum Income Standard price index and the single pension and JSA rates since 2000. The Minimum Income Standard price index, (developed by Donald Hirsch), represents the expenditure patterns of a low income person rather than the average. Between 2000 and 2011 the MIS price index has risen by 47% compared with the CPI by 28% and the RPI by 38%. The incomes of single pensioners have risen by 51% but single people on JSA by only 29%. Next April single people on JSA will get an extra 71 pence and their living standards and those of all other non-pensioners supported by benefits and tax credits including the majority who are in employment will fall further.

Figure 4: Movements in CPI, RPI, MISPI and benefits for single pensioners and single JSA. 2000=100

[1] Professor of Social Policy at the University of York
[2] Bradshaw, J. and Lynes, T. (1995) Benefit Uprating Policy and Living Standards, Social Policy Reports Number 1, Social Policy Research Unit, University of York: York
[3] http://budgetresponsibility.independent.gov.uk/economic-and-fiscal-outlook-december-2012/
[4] Levell, P. and Oldfield, Z. (2011),The Spending Patterns and Inflation Experience of Low-Income Households Over the Past Decade, Commentary 119, London: Institute for Fiscal Studies
[5] Hirsch, D. (2012) Benefit uprating: a return to human decency, Poverty 141, 6-9.