Conservatives have recognised for a long time that inflation is a scourge which hits the poorest hardest. It was the great economic crusade of the Thatcher Government in the 1980s to finally get to grips with the high inflation which had bedevilled British governments for decades. Our latest inflationary problems mean we are all going to be getting poorer over the next year, as higher prices eat away at the real value of our wages, savings, pensions and benefits. That is a much easier prospect for some, however, and for those who have very little disposable income, living week-to-week just getting by, a big jump in the cost of living risks pushing them into debt or personal crisis.
Rishi Sunak has rightly acknowledged that the factors driving the cost of living crisis are mostly global and outside of the Government’s control, and that government cannot, and should not, compensate everybody for the impact of the inflation squeeze. Prices are how markets and economies adjust, and unfortunately for most people they will have to weather what is hopefully (and probably) a temporary inflationary storm.
However, for the very poorest, there is a case for the Government to do more to cushion the blow. As I noted in my evidence to the Work and Pensions Select Committee last week, this is partly the result of a particular quirk of the British welfare system which means it is poorly set up to cope with a period of high or volatile inflation. While working people are understandably concerned about the real value of their wages, there are millions of people who survive only on the safety net provided by the state in order to get by.
These are not just unemployed people, but people who may be caring for loved ones, raising children, or unable to work due to a disability or ill health. these people rely on a monthly payment from the DWP, and for many it can already be a real stretch to get through to the next payday. But benefits in this country are, by convention, uprated each April in line with the level inflation was at in the 12 months to the previous September.
That means, technically, that the Treasury benefits from a six-month gap between the price level used to set benefit rates and the uprating actually happening. Of course, ultimately, it’s impossible for benefits to always keep pace with the cost of living. We are not going to incrementally increase (or decrease) benefits every month based on the ONS’s CPI estimates. However, at this time of extraordinarily high inflation, the use of the September measure does lead to a perverse impact on the real incomes of the very poorest.
The fact that the measure used for benefit uprating is taken so early in the financial year is really a legacy of the days when it took a long time to make the necessary administrative adjustments to change benefit rates. With the modern benefits system, particularly the highly digitised Universal Credit system, the Government can actually change payment relatively fast if it wants to. The £20 uplift to Universal Credit in 2020 and the cut to the taper rate in 2021 were both implemented within a matter of weeks. Normally, though, questions of which month is used don’t really come up, because we would be quibbling about a percentage point here or there, and also because ultimately we know benefit rates will catch up – if there’s a bit of a spike in prices over the winter, that will eventually be reflected in next September’s year-on-year inflation measure.
This year, however, we are talking about much more than a percentage point. Due to the fact inflation happened to start really taking off in the autumn, the measure for September was only 3.1%, which is substantially below the rate inflation is now running at, and that is before the price increases we know are in store over the coming months. By April we may already be looking at inflation of around 8%, well over double the 3.1% increase in benefits. The Resolution Foundation estimate that this amounts to around a £10 billion real-terms cut in overall welfare support over 2022-23.
To address the issue, the Government should look to increase benefits by more than the 3.1% pencilled in, and offset that with a correspondingly lower uprating next year. This is really a question of timing rather than the long-term generosity of benefits. At the moment, we are due to see a huge uprating in April 2023, reflecting the surge in inflation between last September and this. There would, of course, be a cost to the Exchequer from such a move, but crucially it would only be a one-off cost for a single financial year, not an ongoing increase in the structural cost of the welfare system.
There may be apprehension in the Treasury about such measures after the experience of the emergency £20 uplift in Universal Credit, which caused the Government a major political headache when it came to discontinuing it. But I think this is an altogether different proposition. The crucial difference is that ending the £20 uplift involved actively reducing people’s entitlements. This would only involve a lower increase in benefits next year. It is only really when payments are actually ‘cut’ that political pressure tends to come to a head. Indeed, that is precisely why Chancellors are so fond of freezing benefit rates and tax thresholds – they can save money without, in cash terms, having to ‘cut’ anything.
There are no easy answers to the cost of living crisis. The Chancellor cannot wave a magic fiscal wand and simply protect every household from the squeeze. He could, however, go some way to cushioning the blow for those least able to bear it.
Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.
CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.Donations via the website are temporarily unavailable