Benefit rates are normally increased – uprated – every year in April. Some are frozen at the moment but, we hope, only for a short time.
Until this year they’ve normally been increased by the Retail Prices Index (RPI) using the annual change in the previous September. The idea is that this should allow people to be able to buy the same amount this year that they could the previous year, taking account of rises in prices.
This year the government has changed the way it does it. Instead of using the RPI rate last September it’s using the Consumer Prices Index (CPI) in the same month as the basis for the increases in benefit rates from now on. CPI is normally lower than RPI so benefits get increased by less. This April most benefits increased by 5.2%, the CPI rate in September 2011, instead of 5.6% which was the RPI rate – a difference of 0.4%. Crudely this means that someone who could buy £100 worth of goods last April will now only be able to buy £99.60 worth this year.
That might not seem a huge drop, particularly in generally tough times, but this difference is going to carry on year after year. That means less purchasing power each year compared to the previous year. It’s also going to be more of a drop than 0.4% a year in future. The Office for Budget Responsibility, which is the country’s official body responsible for producing financial forecasts, says that the difference between RPI and CPI will have risen to 2% by 2017 making the yearly drop in purchasing power much bigger (1). In the longer term it thinks that the difference will be about 1.4% (2).
I thought that it would be worth trying to put some values to this reduction rather than just ‘knowing’ that benefits would be gradually nibbled down in real value over time. I took the year by year forecasts for the difference between RPI and CPI given by the OBR up to 2017 and then used their longer term estimate of 1.4% after that. Starting from £100 in April 2011 I reduced the real value, each year, by the forecast difference between RPI and CPI in the previous September. The table below shows the first few years.
|RPI / CPI difference||0.40%||0.40%||0.40%||0.70%|
I extended the calculation to see what would be the real value of benefits, if this link continues, much further into the future. On this basis there are a couple of very worrying markers:
The real value of benefits becomes 10% less in 2020
The real value of benefits becomes 25% less in 2033
The real value of benefits becomes 50% less in 2062
Here’s a chart showing the trend (click on it to see a larger version).
The question is; if this government, and those following, continue with this method of indexation, when do benefits fall in real value enough to make life completely unsustainable?
(1) Office for Budget Responsibility, Economic and fiscal outlook March 2012. Cm 8303
(2) Office for Budget Responsibility, Working paper No. 2 – The long-run difference between RPI and CPI inflation, Ruth Miller, November 2011
(ps. My updated paper on Benefits after the Act, with all the new modelling etc. is getting closer – check back in about 10 days).