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 it's far too early to declare Ukip dead

The party could yet thrive if Brexit disappoints those who voted Leave.

"Nothing except a battle lost can be half as melancholy as a battle won," wrote the Duke of Wellington after Waterloo. Ukip can testify to this. Since achieving its founding aim - a British vote to leave the EU - the party has descended into a rolling crisis.

Theresa May's vow to pursue Brexit, and to achieve control of immigration, robbed Ukip of its political distinctiveness. But the party's greatest enemy has been itself. Its leader Paul Nuttall did not merely lose the Stoke by-election (despite the city recording the highest Leave vote), he self-destructed in the process. Contrary to his assertions, Nuttall did not achieve a PhD, was never a professional footballer and did not lose "close personal friends" at Hillsborough. Ukip's deputy Peter Whittle pleaded last weekend that voters needed more time to get to know Nuttall. No, the problem was that they got to know him all too well. A mere three months after becoming leader, Nuttall has endured a level of mockery from which far stronger men would struggle to recover (and he may soon be relieved of the task).

Since then, Ukip's millionaire sugar daddy Arron Banks has threatened to leave the party unless he is made chairman and Nigel Farage is awarded a new role (seemingly that of de facto leader). For good measure, Farage (a man who has failed seven times to enter parliament) has demanded that Ukip's only MP Douglas Carswell is expelled for the crime of failing to aid his knighthood bid. Not wanting to be outdone, Banks has vowed to stand against Carswell at the next election if the dissenter is not purged. Any suggestion that the party's bloodlust was sated by the flooring of Steve Woolfe and Diane James's 18-day leadership has been entirely dispelled.

For all this, it is too early to pronounce Ukip's death (as many have). Despite May's ascension and its myriad woes, it has maintained an average poll rating of 12 per cent this year. This is far from its 2014 zenith, when it polled as high as 25 per cent, but also far from irrelevancy. Incapable of winning Labour seats itself, Ukip could yet gift them to the Conservatives by attracting anti-Tory, anti-Corbyn voters (in marginals, the margins matter).

Though Theresa May appears invulnerable, Brexit could provide fertile political territory for Ukip. Those who voted Leave in the hope of a radical reduction in immigration will likely be dismayed if only a moderate fall results. Cabinet ministers who boasted during the referendum of their desire to reduce immigration have already been forced to concede that newcomers will be required to fill vacancies for years to come. Ukip will be the natural vehicle for those aggrieved by Brexit "betrayal". Some Leave voters are already dismayed by the slowness of the process (questioning why withdrawal wasn't triggered immediately) and will revolt at the "transitional period" and budget contributions now regarded as inevitable.

The declarations of Ukip's death by both conservatives and liberals have all the hallmarks of wishful thinking. Even if the party collapses in its present form, something comparable to it would emerge. Indeed, the complacency of its opponents could provide the very conditions it needs to thrive.

George Eaton is political editor of the New Statesman.