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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PMQs review: Jeremy Corbyn prompts Tory outrage as he blames Grenfell Tower fire on austerity

To Conservative cries of "shame on you!", the Labour leader warned that "we all pay a price in public safety" for spending cuts.

A fortnight after the Grenfell Tower fire erupted, the tragedy continues to cast a shadow over British politics. Rather than probing Theresa May on the DUP deal, Jeremy Corbyn asked a series of forensic questions on the incident, in which at least 79 people are confirmed to have died.

In the first PMQs of the new parliament, May revealed that the number of buildings that had failed fire safety tests had risen to 120 (a 100 per cent failure rate) and that the cladding used on Grenfell Tower was "non-compliant" with building regulations (Corbyn had asked whether it was "legal").

After several factual questions, the Labour leader rose to his political argument. To cries of "shame on you!" from Tory MPs, he warned that local authority cuts of 40 per cent meant "we all pay a price in public safety". Corbyn added: “What the tragedy of Grenfell Tower has exposed is the disastrous effects of austerity. The disregard for working-class communities, the terrible consequences of deregulation and cutting corners." Corbyn noted that 11,000 firefighters had been cut and that the public sector pay cap (which Labour has tabled a Queen's Speech amendment against) was hindering recruitment. "This disaster must be a wake-up call," he concluded.

But May, who fared better than many expected, had a ready retort. "The cladding of tower blocks did not start under this government, it did not start under the previous coalition governments, the cladding of tower blocks began under the Blair government," she said. “In 2005 it was a Labour government that introduced the regulatory reform fire safety order which changed the requirements to inspect a building on fire safety from the local fire authority to a 'responsible person'." In this regard, however, Corbyn's lack of frontbench experience is a virtue – no action by the last Labour government can be pinned on him. 

Whether or not the Conservatives accept the link between Grenfell and austerity, their reluctance to defend continued cuts shows an awareness of how politically vulnerable they have become (No10 has announced that the public sector pay cap is under review).

Though Tory MP Philip Davies accused May of having an "aversion" to policies "that might be popular with the public" (he demanded the abolition of the 0.7 per cent foreign aid target), there was little dissent from the backbenches – reflecting the new consensus that the Prime Minister is safe (in the absence of an attractive alternative).

And May, whose jokes sometimes fall painfully flat, was able to accuse Corbyn of saying "one thing to the many and another thing to the few" in reference to his alleged Trident comments to Glastonbury festival founder Michael Eavis. But the Labour leader, no longer looking fearfully over his shoulder, displayed his increased authority today. Though the Conservatives may jeer him, the lingering fear in Tory minds is that they and the country are on divergent paths. 

George Eaton is political editor of the New Statesman.

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