Pegging benefits to wage inflation fails Macroeconomics 101

It's all about countercyclical spending.

As Gavin Kelly has written, it's unlikely that benefits increases will be linked to earnings in the way Newsnight's Allegra Stratton claimed last week. To do so would be short-termist in the extreme, and, given the role the OBR has in the budgetary process these days, practically illegal.

The reason is that, although wages are rising more slowly than the CPI, that's an unusual state of affairs. For most of the last decade, average weekly earnings have risen faster than inflation, usually by a considerable margin:

Overlay from Timetric

 

So one of the problems with hooking the uprating of benefits to pay is that it would be terribly short-term. It will save money until the economy recovers, and then cost far, far more than it would if there were no change at all. And if you want to borrow against the future, a better way to do it would be to just borrow against the future – using our ridiculously low interest rates.

That's the reason why it won't happen. But there's another reason why it shouldn't: The rating of benefits to inflation is one of the few fiscal stabilisers we have that works in boom times as well as bust.

Fiscal stabilisers are a key aspect of moving Keynesian economics from theory to practice. Acting counter-cyclically requires saving in a boom and spending in a bust, but that's generally rather tricky to do politically. As the election of the coalition proved, the fallacy that "there's no money left" is a powerful political motivator, and it's similarly tricky to argue for savings to be made and budgets to be cut if the economy is running at a surplus.

Fiscal stabilisers are aspects of the economy which do part of the job for us. The archetypal stabiliser is unemployment benefit. As more people lose their jobs in a recession, so we spend more money paying them Jobseeker's Allowance. When they gain employment again, as the recovery begins, the spending drops. Provided governments don't do anything stupid like end JSA, a small proportion of their spending is guaranteed to be counter-cyclical.

If benefits were to be pegged to wages, rather than inflation then some of that counter-cyclicality would be scrapped. The benefits bill would shrink in recessions and increase in boom times, compared to where it would be without the change. That would mean prolonged depressions, and a magnification of the boom-and-bust cycle. Macroeconomically, its one of the worst things you could do.

Unless, of course, it's all just a ploy to balance the books on the back of the poor, and the plan is to reverse the change once start wages increasing above inflation again. But no-one would be so cynical as to suggest that.

Piggy banks wait to be filled in a shop in San Francisco. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Why are boundary changes bad for Labour?

New boundaries, a smaller House of Commons and the shift to individual electoral registration all tilt the electoral battlefield further towards the Conservatives. Why?

The government has confirmed it will push ahead with plans to reduce the House of Commons to 600 seats from 650.  Why is that such bad news for the Labour Party? 

The damage is twofold. The switch to individual electoral registration will hurt Labour more than its rivals. . Constituency boundaries in Britain are drawn on registered electors, not by population - the average seat has around 70,000 voters but a population of 90,000, although there are significant variations within that. On the whole, at present, Labour MPs tend to have seats with fewer voters than their Conservative counterparts. These changes were halted by the Liberal Democrats in the coalition years but are now back on course.

The new, 600-member constituencies will all but eliminate those variations on mainland Britain, although the Isle of Wight, and the Scottish island constituencies will remain special cases. The net effect will be to reduce the number of Labour seats - and to make the remaining seats more marginal. (Of the 50 seats that would have been eradicated had the 2013 review taken place, 35 were held by Labour, including deputy leader Tom Watson's seat of West Bromwich East.)

Why will Labour seats become more marginal? For the most part, as seats expand, they will take on increasing numbers of suburban and rural voters, who tend to vote Conservative. The city of Leicester is a good example: currently the city sends three Labour MPs to Westminster, each with large majorities. Under boundary changes, all three could become more marginal as they take on more wards from the surrounding county. Liz Kendall's Leicester West seat is likely to have a particularly large influx of Tory voters, turning the seat - a Labour stronghold since 1945 - into a marginal. 

The pattern is fairly consistent throughout the United Kingdom - Labour safe seats either vanishing or becoming marginal or even Tory seats. On Merseyside, three seats - Frank Field's Birkenhead, a Labour seat since 1950, and two marginal Labour held seats, Wirral South and Wirral West - will become two: a safe Labour seat, and a safe Conservative seat on the Wirral. Lillian Greenwood, the Shadow Transport Secretary, would see her Nottingham seat take more of the Nottinghamshire countryside, becoming a Conservative-held marginal. 

The traffic - at least in the 2013 review - was not entirely one-way. Jane Ellison, the Tory MP for Battersea, would find herself fighting a seat with a notional Labour majority of just under 3,000, as opposed to her current majority of close to 8,000. 

But the net effect of the boundary review and the shrinking of the size of the House of Commons would be to the advantage of the Conservatives. If the 2015 election had been held using the 2013 boundaries, the Tories would have a majority of 22 – and Labour would have just 216 seats against 232 now.

It may be, however, that Labour dodges a bullet – because while the boundary changes would have given the Conservatives a bigger majority, they would have significantly fewer MPs – down to 311 from 330, a loss of 19 members of Parliament. Although the whips are attempting to steady the nerves of backbenchers about the potential loss of their seats, that the number of Conservative MPs who face involuntary retirement due to boundary changes is bigger than the party’s parliamentary majority may force a U-Turn.

That said, Labour’s relatively weak electoral showing may calm jittery Tory MPs. Two months into Ed Miliband’s leadership, Labour averaged 39 per cent in the polls. They got 31 per cent of the vote in 2015. Two months into Tony Blair’s leadership, Labour were on 53 per cent of the vote. They got 43 per cent of the vote. A month and a half into Jeremy Corbyn’s leadership, Labour is on 31 per cent of the vote.  A Blair-style drop of ten points would see the Tories net 388 seats under the new boundaries, with Labour on 131. A smaller Miliband-style drop would give the Conservatives 364, and leave Labour with 153 MPs.  

On Labour’s current trajectory, Tory MPs who lose out due to boundary changes may feel comfortable in their chances of picking up a seat elsewhere. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog. He usually writes about politics.