The hidden cuts are always the nastiest. Although Osborne announced that for benefit upratings he was abandoning the normal inflation measure that has been used since 1974, namely the retail price index (RPI), and replacing it by a consumer prices index (CPI), the full implications of this have only now become clear. Though the child benefit and housing benefit cuts have had much more publicity, the switch from RPI to CPI will be much more devastating.
This is partly because it will apply across the board to benefits, tax credits and public sector pensions, and partly because the impact is cumulative and the totality of the cutbacks grow steadily year on year. By 2014, the end of this Parliament, this seemingly innocuous change will reduce the incomes of the poorest by no less than £6bn. By itself alone it accounts for more than half of the welfare cuts outlined in the budget. This is far more than the £1bn a year saved through withdrawing child benefit from higher-rate taxpayers which caused such commotion.
The effect of this sleight-of-hand will be felt quickly next year. Benefits will now be increased next April by 3.1% (CPI) whereas if RPI had been retained the increase would have been half as high again, at 4.6%. So why the difference? It’s largely because the RPI includes housing costs whilst the CPI does not – on the flimsy grounds that it is difficult to establish a common procedure across Europe! A more likely explanation is that as housing costs rise over the next few years, the Government is paring down its commitment to poorer families by using a non-housing costs uprating index.
There’s another nasty catch to it that’s not immediately obvious. It will hit not just welfare recipients, but public sector pensioners. Three weeks ago it was announced in the Hutton Report (by an ex-Labour Minister chosen to give an aura of cross-party support for conclusions that were essentially Tory ones) that the CPI switch will be cutting public sector pensions by £1.8bn a year in 2015-6, a shortfall that will steadily grow further over time. The effect is to reduce pension rights to employees in these schemes by 15% on average.
In addition the Government is also trying to make CPI the default measure of inflation in the private sector too. It has been officially estimated that if CPI were to reduce the inflation compensation in occupational schemes by even as little as 0.5% a year, it would cut employer payments by 5% by 2030.
But most striking of all in this RPI to CPI switch is the discriminatory bias against poor families. If the CPI is right for benefits and pensions, why not for tax thresholds too? That would save money for the Exchequer – in fact far more – but it would disadvantage middle and high earners. Can’t allow that, can we?