Many column inches have been filled with comment over the government’s decision to restrict a number of benefits and tax credits to increases of 1% over the next couple of years.
This piece (£), however, by the FT’s economics editor, Chris Giles, warrants a special mention, not least because it is makes some interesting points that nobody else seems to have done.
Here’s a (fairly lengthy) extract:
In any case, good evidence exists on living standards to assess the merits of restricting benefit uprating. According to the most recent year of data, 2010-11, the crisis has caused real household net incomes around the middle and upper-middle tiers of the income distribution to fall back to levels last seen in 2002-03. In the bottom 30 per cent of households, real incomes are 3-4 per cent higher than they were. This squeeze in middle incomes relative to lower incomes is more modest than the Tory slogan implies and was entirely unplanned. It is therefore reasonable for the government to seek to redress it, though it is harder to argue that only non-pensioners should bear the burden.
Allowing incomes towards the bottom of the income distribution to be eroded by inflation is also more palatable than we would normally think because we know real incomes have grown faster than 3-4 per cent. That calculation is too low because actual incomes have been adjusted for inflation using the deficient retail price index, which overstates price rises through the use of a biased formula.
The evidence from the income distribution also tells us that another reason for the squeeze on middle incomes is that the jobs market over recent decades has increasingly become polarised into lovely jobs paying good wages and lousy jobs paying little. Again, this change was unplanned and is not particularly welcome, as graduates such as me have done better than we reasonably could have hoped when making a choice to go to university while those taking an alternative path have lost out. The government’s inclusion of benefits for working people in the 1 per cent cap on social security rests, therefore, on much more shaky foundations.
Government cannot be expected to compensate all parts of society fully for unexpected changes in their living standards but the available evidence shows that the middle and upper-middle tiers of the income distribution have been hit harder than most in recent years and so the redistribution in the form of a temporary cap on out-of-work benefit uprating, fuel duty freezes and higher income tax allowances is perfectly reasonable.
What was unwise was to justify the move on the basis that an index of average earnings has grown slower than one of prices in recent years, creating a reasonable expectation among poorer families that social security payments should be uprated with earnings once these are growing faster than prices again.
We all must hope that productivity improves sufficiently for average earnings to begin to rise again in real terms soon. When that happens and the Treasury refuses to link social security and tax thresholds to earnings, everyone will complain and the government will have little comeback. By using the wrong arguments, ministers have pandered to Britain’s infatuation with indexation and the desire to chant “it’s not fair”. The decision will come back to bite them.
* Nick Thornsby is Thursday Editor of Liberal Democrat Voice and blogs here.