I was saddened to hear during the Autumn Statement that increases in many benefits would be capped at 1% for the next three years, particularly because I was in total agreement with David Laws when he opposed a similar policy last year. I was also disappointed that after months of party figures grandstanding about any welfare cuts being contingent on reformed property taxes, no higher council tax bands were announced.
Abandoning indexation for benefits does not just affect them in the year that benefits are not indexed. To use Job Seeker’s Allowance as an example, if inflation is 3% per year over the next three (the rough average of the past decade), and rises in benefits are capped to 1%, a weekly payment will effectively have been reduced by £4.43. But even assuming that indexation is taken back up again the year after, it will be raised from a lowered figure. Without any guarantee to the contrary, the missed increases will be permanently lost, not temporarily postponed. This is a small cut in the grand scheme of government expenditure, but the idea that wages should not grow at a slower rate than benefits may well prove popular. Benefits do not rise at the same rate as wages during years of economic growth: wages outstrip inflation, whereas benefits are only meant to keep up with price increases.
If we had previously followed this precedent, JSA would be an even more meagre allowance now. In the years since 1980 (when the Earnings Link to benefits was abolished), inflation has outstripped NGDP growth in five recession years: 1981, 1991, 1992, 2008 and 2009. Had we only raised JSA by 1% in these years, by 2010 it would only have been £48, instead of the £67.50 that it actually was*. Is that a liveable amount? Yes, probably just about. But it’s also indefensible to insist that people who have become unemployed attempt to live on it, given that JSA makes up less than 3% of the welfare budget, and a full third goes to people whose incomes are already above average.
We must be realistic: the earnings link is not coming back. For better or worse, as the pre-war mass unemployment became a distant memory, attitudes toward unemployed people have hardened. Though some may disagree, this doesn’t mean we should aim to return to post-war full employment. Frictional unemployment is something that must exist in an advanced economy. It’s for precisely this reason that I find this change so regressive. If you recognise that a conscious choice has been made by governments to construct an economic system in which unemployment must exist, treating unemployed people as if it is their fault that they are out of work is a ruthless way of reducing spending. We have signed up this policy, coming from a Chancellor who is foremost an electoral strategist, knowing that jobless people do not vote Conservative.
I didn’t join the Liberal Democrats because I thought we were moderately economically liberal. I joined because I agreed with people like David Laws: we have every opportunity to be more economically liberal than the Conservatives, showing that financial freedom works for people without unnecessarily cutting public expenditure where it hurts the worst-off. There is no chance of a long-term reduction in the size of the state if it is associated solely with reductions in the living standards of people on low incomes and who have the misfortune to be out of work.
Given Nick’s speech on welfare this week, I don’t believe that it’s now possible to stop this change from occurring entirely. What it is possible to do is to amend the Welfare Uprating Bill to insist that as soon as the median wage begins to rise above inflation, not only is indexation returned, but JSA should also be increased by the amount that it missed during the period of restraint. I hope we might be able to make this a prerequisite for our support of the policy. If a Liberal Democrat parliamentarian took this opportunity up, it will not to stop, but will at least mitigate the long term damage of such a problematic change.
* Mike Bird is the Chair of Liberal Reform