Tuesday 22 June 2010

Why Osborne's biggest "stealth cut" will increase inequality

Commenting on the budget, Fabian Society Research Director Tim Horton noted that what sounds a relatively technical change in how benefits were uprated - using Consumer Price Inflation rather than Retail Price Index - would be a major "stealth cut", saving £6 billion on benefits but significantly increasing income inequality, as those on benefits fall further behind average earnings. It has the potential to be the the most significant welfare change in the budget in the long-term.

On the changes to benefit uprating

“Over the long term, perhaps the most significant welfare change in the budget is the announcement that in future benefits and tax credits will be uprated annually only in line with Consumer Price Inflation rather than Retail Price Inflation.

“The impact from one year to the next won’t be huge, but played out over many years this will have a dramatic effect in increasing inequality in society – just as it did in the 1980s, when Margaret Thatcher broke the earnings link for many benefits.

“Many low-income households are reliant on benefits and tax credits for a significant proportion of their income. Reducing the rate at which these benefits increase means the income of the poorest households will fall further and further behind everyone else.”

On the tax changes

“The increase in the income tax threshold will do nothing for the millions who don’t earn enough to pay income tax. Three million households in the poorest quarter of the population will see no gain at all from this tax cut – including pensioners, the sick, the unemployed and parents in low-paid part-time work. Yet all these groups will be hammered by the VAT increase.

“To cut income tax, a progressive tax, while increasing VAT, a regressive tax, is unjustifiable. It runs completely counter to the Lib Dems’ stated ambition of a fairer tax system.”

On asset-based welfare

“In two months, the coalition government have dealt a killer blow to the agenda of spreading assets to more people in society, scrapping the Child Trust Fund and now scrapping the extension of the Savings Gateway – a scheme that incentivises low-income households to build up more savings.

“The government say they want people on low incomes to take responsibility and build up savings, but at the same time are scrapping the measures to encourage them to do this.”

Comments from Tim Horton, research director of the Fabian Society.


Unknown said...

Are the point to benefits to decrease income inequality or provide a safety net?

Surely equality should be measured, in some respects, on a level playing field.

If someone has a job and works hard and gets promoted why should their income be compared to someone on benefits when assessing inequality.

13eastie said...

You have to take a narrow view of things to make this argument work.

First, the rate of increase in benefits will only affect those on long-term benefits. This is a situation governments and individuals should be striving to avoid by boosting opportunities and reducing the scope for and likelihood of state dependency.

Second, the purpose of the welfare state is to act as a safety net for those in need. As such, increases should mirror those experienced by the hard-up in the cost of living during temporary receipt of state assistance. The RPI includes mortgage interest - an expense most incurred by middle class families. The CPI more closely reflects the cost of living for the needy and such a basis for increase ought therefore to meet genuine needs.

Third, this is not the case for all benefits as Horton suggests. The biggest group of people with no employment option - pensioners - will now benefit from an earnings link. This is something New Labour has failed during thirteen years to implement as evidenced by Brown's memorable and derisory 75p increase.

The Savings Gateway is a ludicrous scheme: the last thing the government should be doing now and for the next two years is borrowing more money to encourage and reward saving. Benefits are there to help people to survive, not to increase their capital wealth. If someone manages to put away a £600 nest egg derived from tax-payers while they're on the JSA for two years, it should tell us that there is something very very wrong with the benefits system. To add another £300 to the amount already needlessly taken out of the economy is further lunacy. The 50% premium payable is very attractive to those who would seek to abuse it.

Ditto the Child Trust Fund - £200 is an insult to those who will in the meantime lose massively while their parents pay the penalty for Labour's profligacy.

Sunder Katwala said...

That's a very misleading account of Labour's record with pensioners: we have a much lower level of pensioner poverty, and for the first time in British history, pensioners are less likely to be in poverty than other adults.

13eastie said...

Sunder, it's not misleading at all - the article was about the width of income gaps and I simply pointed to actions taken in this regard.

Brown failed for thirteen years to link pensions to earnings. But there's more. He also orchestrated a Maxwellian raid the pension funds - even Equitable Life which he allowed to create misery for thousands of its members who have been robbed of investments made in good faith. (No-one knew quite how far Labour would eventually succeed in its quest to sell tomorrow to yesterday).

It is also certainly true that Brown arranged for the monumentally insulting 75p increase in the state pension.

I thought this was supposed to be about the width of the income gap the growth of which for those reliant on the State Pension has only now been halted by Osbourne. I can see why you would rather talk instead about poverty rates, but EITHER THE INCOME GAP IS RELEVANT OR IT ISN'T.

If it's "misleading" to focus only on the mechanism for increases in these benefits, why then are you publishing Horton's article, which is concerned with nothing else, makes the false assumption that all benefit recipients will receive them in perpetuity, and which suggests disingenuously that a CPI link will apply to all benefits?

Cantab83 said...

Why has Osborne restored the link between pensions and earnings now? Is it because the public sector pay freeze and rising unemployment means that average earnings will be less than inflation over the next two years? So, is that another stealth cut?