Why it's unlikely benefits increases will be linked to earnings

Gloomy projections all round.

Following another Newsnight scoop, there must be debate in Westminster about whether the coalition are going to change their approach to uprating benefits - increasing them annually in line with inflation - for people of a working age. Coalition splits have already been predicted and then resolved before the pre-Autumn statement debate has even got underway.

This issue arises because the Coalition are on the hunt for welfare savings and playing around with benefit upratings is always one of the first places HM Treasury will turn to save money.  To start with it’s worth recalling that the Coalition has already changed its uprating policy from RPI (or the derived ROSSI index) to CPI for most working age benefits – generating significant savings, arising from lower living standards for recipients - than would otherwise be the case. So any further change in upratings policy comes on top of this.

A straightforward freeze in all benefits, as has been reported in some places, will of course save significant sums – though significantly less than the £10bn annual figure that George Osborne has said he wants. But it is also been reported that as part of the hunt for savings in the future, perhaps after a two-year freeze, benefits would be uprated in line with earnings.

Now, this is rather odd. According to the OBR, earnings are expected to outpace inflation from the start of 2013, with the gap growing to around 2.5 per cent a year from 2015. Based on these projections, an earnings link would be a very expensive policy indeed.

It may well be that HM Treasury no longer believes these sorts of earnings projections. Indeed a new report out today by leading labour market economists Steve Machin and Paul Gregg provides strong grounds for expecting a very slow recovery in wages. That’s because levels of unemployment are having such a chilling effect on pay – far more so than was the case when we were seeking to recover from previous recessions (this research also helps explain why we saw wage stagnation in the years prior to the recession). Indeed, today’s FT takes a bit of a leap by suggesting that the Treasury may seize on this report to pave the way for a much gloomier outlook for wages which would in turn justify linking benefits to earnings in the future.

My guess is that this won’t happen (although you wouldn’t necessarily bet against a freeze in benefits being followed by a move to a new approach of uprating benefits by the lower of either inflation or earnings). That’s because in order for the Treasury to realise any savings by linking benefits to wages rather than inflation they would have to produce some earnings projections that the OBR would need to verify.

These would have to be radically different from the existing OBR numbers. What’s more, they would need to show that typical real-terms wages – flat since 2003, falling since 2009 – are set to carry on falling throughout the next Parliament. That’s announcing that most working people are going to carry on getting poorer during the so-called recovery. Something tells me George Osborne isn’t going to do that. 

A man walks on pennies. Photo: Getty

Gavin Kelly is a former adviser to Downing Street and the Treasury. He tweets @GavinJKelly1.

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Theresa May's Article 50 letter fires the Brexit starting gun

But as well as handing over a letter, Theresa May hands over control of the process. 

So the starting gun will be fired, and the Brexit process will begin. The delivery of the letter from Theresa May to Donald Tusk is a highly symbolic moment. It is also, crucially, the moment when the Prime Minister loses control of the process.

Perhaps the most striking thing about the Brexit process to date has been the remarkable degree of control exercised over it by Downing Street. Brexit means Brexit, declared the Prime Minister, and since that day it has been her who has defined what precisely it does mean. After a quarter century of bitter division over Europe, culminating in a referendum where the Parliamentary party was split down the middle, she has managed to unite the overwhelming majority of the Conservative party for a “hard Brexit” that very few claimed to support a year ago.  As an impotent opposition and ineffective Tory opponents watched on, she has made it clear from the first that Britain will leave the single market and, almost certainly, the customs union. Rumours from Whitehall suggest that, whatever the concerns or doubts of line departments, these have been ignored or over-ruled.

Now, however, the Prime Minister has lost control of the process. Inevitably, given the relative strength of the parties’ negotiating positions, both the agenda and outcome of the talks will be determined largely by our European partners. It is of course true that they have an interest in preserving trade with us, as do we with them; nor do they have any interest, either economic or political, in “punishing” us for the sake of it. That being said, our interests and theirs are far from aligned. They have other priorities. Not allowing cherry picking among EU rules is one. Ensuring Britain pays its fair share is another.

And, while it is in neither side’s interest for the talks to collapse, we have considerably more to lose. May’s claim that “no deal is better than a bad deal” may play well with the Daily Express, but is has not gone down well with UK business. As the economics professor Jonathan Portes sets out here, the consequences of “no deal” would go far beyond the mere imposition of tariffs; the economic impacts would be significant for other EU countries, and very  severe indeed for the UK.  There are increasing signs that ministers are, belatedly, appreciating the risks, and are anxious to avoid such an outcome.

So both sides want a deal – and the UK, at least, needs one. But several hurdles stand in the way. In the first place, there is the vexed question of money. Britain, as our partners are concerned, has outstanding liabilities that must be paid. The British government may accept some of these, but is sure to quibble about the sums. Discussions of money are never easy in the EU, and the task of figuring out what a net contributor to the budget might owe at a time when discussions over the new 5 year funding programme are about to start will be no exception.  Nevertheless, if it were simply left to the civil servants, no doubt an acceptable compromise would be reached. The bigger  issue  is whether Mrs May  is prepared to take on some of her own backbenchers – and, more importantly, sections of the UK press – to sell a deal that will inevitably mean that the UK writes a sizeable cheque.

Second, there is the question of how to ensure the "frictionless" trade of which the Prime Minister has spoken. This makes eminent sense on one level – why make trade more difficult with the partner that buys 44 per cent of our exports? On another, though, it is hard to see how she can deliver.

I for one simply lack the imagination to see how we can be sufficiently out of the customs union to allow us to sign our own trade deals, while sufficiently in it to avoid customs checks and tariffs. For another, it is difficult to foresee conditions under which the EU would allow us to enjoy any of the benefits of the single market – whereby states accept each other’s rules and standards – without the oversight provided by the European Court of Justice.

And finally, since all parties now seem to accept that the prospects of concluding an “ambitious and comprensive” trade deal by March 2019 are vanishingly, there is the question of what happens then. The government has talked about an “implementation phase”; but how do you have an “implementation phase” when you do not know exactly what you are trying to implement?

It could just be me. I may simply not have fathomed the subtle devices that might allow these circles to be squared. But it does seem clear to me that doing so would be far from straightforward.

And then, of course, whatever is negotiated needs to be approved. Forget for a moment the continent, where there has probably never been a worse time to try to get a free trade deal approved by 27 European parliaments. The Prime Minister will almost certainly have parliamentary problems here in the UK.

The Labour party has adopted a position whereby they will vote against any deal that does not provide the “exact same benefits” as we currently have as members of the single market and customs union,” to quote Keir Starmer. If the other member states are to be believed, the full benefits of membership are, and will be, only available to members, so this is will simply not be the case.

Labour, then, will probably end up voting against the bill. What Tories opposed to either Brexit or to leaving the single market might then do is anyone’s guess. It may be that, by autumn of 2018, they feel sufficiently empowered  - either because of a shift in public opinion, or because of indications of falling economic confidence, or, conceivably, because of declining faith in the Prime Minster – to make common cause with the opposition.

Under such circumstances, May might face the real possibility of defeat in Parliament. Which in turn poses the question as to why she would she risk putting a deal that might be rejected to a vote?

It seems to me that she would have very little incentive to do so. If she cannot get the kind of deal that seems, on the surface, impossible to get anyway, surely better, from her point of view to simply walk away? Blaming the Europeans for failure would be all to easy. And holding a snap election on a patriotic ticket and opposed by the current Labour party would guarantee a healthy majority.

Two years is a long time in politics. And much that is unexpected will doubtless transpire during the negotiations to come. Do not, however, discount the possibility that it might all go wrong. 

Anand Menon is director of The UK in a Changing Europe and professor of European politics and foreign affairs at King's College London.