The Staggers

The New Statesman’s rolling politics blog

Freezing benefits is bad for the poor and for the economy

Osborne's plan to break the link with inflation is neither economically wise nor socially just.

By George Eaton Published 18 September 2012 8:33

Chancellor George Osborne. Photograph: Getty Images.

George Osborne is considering a two-year freeze on most benefits. Photograph: Getty Images.

With his deficit reduction plan increasingly off-track, George Osborne is reportedly considering breaking the link between benefit levels and inflation and freezing payments to claimants. It's a move the government discussed last year, although it ended up raising benefits by 5.2%, in line with September inflation (the figures traditionally used to calculate payments). But in his speech on welfare earlier this year, Cameron suggested that benefits could be linked to wages instead. He said:

This year we increased benefits by 5.2 per cent.

That was in line with the inflation rate last September.

But it was almost twice as much as the average wage increase.

Given that so many working people are struggling to make ends meet we have to ask whether this is the right approach.

It might be better to link benefits to prices unless wages have slowed – in which case they could be linked to wages.

Although pensions, which go up annually by either inflation, earnings, or 2.5% (whichever is higher), would be exempt from the move, it's thought that 90% of benefits would be frozen. Having already cut welfare payments by uprating benefits in line with the Consumer Price Index rather than the (generally higher) Retail Price Index (see James Plunkett's Staggers blog on the coalition's "£11bn stealth cut"), Osborne is preparing to squeeze the poor again. And, while the move would have saved an estimated £14bn since 2008/09, it makes little economic sense.

At a time of high unemployment (forecasters expect the jobless total to rise to 8.7% next year), freezing benefits will only further depress consumer demand. Unlike the rich, most benefit claimants can't afford to save, so they spend whatever they receive and stimulate growth as a result. In this regard, it's heartening to learn that, according to the BBC's Nick Robinson, Iain Duncan Smith believes the policy would be "bad economics" since the poor "spend not save". There's also, of course, a moral objection. Cutting support to the poorest means even more families having to choose between heating and eating.

But the poor, to their cost, can't employ armies of lobbyists to plead their case. There is no easier target for a right-wing government - and no less deserving one.

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Tags: George Osborne Conservatives Spending Cuts Iain Duncan Smith

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22 comments

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Wed, 2012-09-19 04:45 — Kreditanstalt

"Osborne's plan to break the link with inflation is neither economically wise nor socially just."

Well, it IS wise for the few remaining wealth generators, savers, investors and taxpayers who have to foot the bill.

And probably for many of the rest of us who would pay (via price inflation) for the necessary money-printing and borrowing if we DIDN'T...

But apparently not a good idea if you're silly enough to believe that money taken from its rightful owners and spent by government can magically create consumer demand...

Tue, 2012-09-18 23:10 — Fraziel1

Gareth, i am on relatively low wages and it sickens me to see people on benefits get a larger rise than I have had in yrs. I work for the government ( dealing with benefit claims ironically) and am in my SIXTH year of pay austeritywith another one , at least, to come. In that time my wages have gone up my 8% whereas inflation has gone up my over 20%, as have benefits. It is not right. If people who work are not getting the rises then neither should those on benefits. A 5.2% increase was outrageous when people in work were getting 1% or zero from the government. Everything else you said is just noise and excuses. It should be one rule for all and those in work should not be penalised while those on benefits carry on regardless. I think osbourne is a twat but he is right on this and the benefit cap.

Wed, 2012-09-19 20:45 — matthew fox (not verified)

Are you sickened by the thought, that severely disabled people, who cannot work, have had a larger rise then you have had in years?

Stop having a go at people who are on benefits, your going to find what I am about to say very strange. Most people on benefits would prefer to be working, I have never bought the dishonest narrative, peddled by the Daily Mail, that people on benefits are " workshy"

The easiest way to get people back to work, is give to them a job, that way there is no excuses.

Wed, 2012-09-19 11:22 — Gareth

I agree with you that those on low wages can be little better off than people on benefits (I've worked minimum wage jobs so I do know what it's like!) I would make the same argument in respect to people in low wage jobs: salaries should be set sufficiently high that people can afford a basic standard of living (and actually, at least a bit beyond this). There's much to be said for the idea of a living wage, in my view. But also, the government could do more to exert downward pressure on energy and petrol prices, for example.

I still maintain that fairness involves looking at basic needs first and foremost, then giving people who need it a "leg up" so they can support themselves. There's more than enough money in our society to do this, but increasingly, it is held by a small minority of elites.

Tue, 2012-09-18 21:26 — Fraziel1

Another good policy. Why the hell should people on benefits get increases 5 times higher than i got in full time work? Linking benefits increases to earnings seems profoundly reasonable to me. If people in work only get 1 or 2% then so should those on benefits. It is only fair.

Mon, 2012-10-08 15:24 — S. Strauch (not verified)

Because 5% of a very small amount is less than 1-2% of a working wage in most cases. Or is that too difficult for you to comprehend?

Tue, 2012-09-18 22:47 — Gareth

Because benefits are a safety net for meeting people's most basic needs. They should be enough to ensure that the most vulnerable in our society can feed themselves, house themselves, keep warm and healthy. Therefore, they should reflect the cost of this, which is measured in the RPI. Failure to raise benefits in line with inflation erodes their ability to provide for bare essentials, which in my view would be a scandalous move for a society which is one of the wealthiest on the planet.

Whereas, a decent salary should provide beyond a subsistence level. Changes in wage levels might affect what sort of holiday someone can afford, how often they can buy new clothes or change their car. While the failure of wages to keep pace with inflation in recent years has hit people's living standards, it is only the poorest for whom this means needing to decide whether to eat or have the heating on. It's not meaningful to insist on fairness when you're comparing yourself to people who are already less well off.

Tue, 2012-09-18 19:08 — Iain hill (not verified)

We know politicians are ignorant of , and often contemptuous of history, but if Osborne can be bothered to look back over the last 15 years, he will find times when wages rose and pensioners got 0% increase. Geese and ganders, I think!

Tue, 2012-09-18 13:39 — Ivor Pong (not verified)

If they make benefits even lower than now they will make payments to rent girls and rent boys cheaper for the rich.

Just think Willie Haggeared can have two researchers for the price of one; it will help keep expenses down , OR HAVE TWO NIGHTS FOR THE PRICE OF ONE.

Tue, 2012-09-18 10:45 — RichardM (not verified)

The million long-term unemployed has been around since Thatcher's day, but I wouldn't expect a political and economic illiterate like Indu Pendent to know that

Tue, 2012-09-18 13:25 — Indu Pendent

So the £600Bn borrowed and pissed away by Labour did not fix long term unemployment. Why is that? Is it because the 1 million long term unemployed dont need money spent on them to vote Labour?

Wasnt reducing long term unemployment one of Labour's aim's when they took office.

Did Labour intentionally increase the disparity between the rich and poor or was that something the party does not care about (i.e. it does not effect the opinion polls)?

Tue, 2012-09-18 18:34 — matthew fox (not verified)

Don't forget the £264 billion that Thatcher and Major borrowed Inastew.

Mrs T and Major increased VAT by over 100%, squandered billion after billion of north sea oil, burn't through all the money raised from the sell off BT,BG, BP and so on.

In the last year of John Major's government, 9p in every pound of government spending accounted for debt interest repayments.

Would you like Mrs T record on long term unemployment, taking into account the 61 changes to the unemployment statistics.

Your still not sore at people cheering Gordon Brown and booing Cameron, are you?

Tue, 2012-09-18 16:13 — PatM

The Tories will increase the National Debt by £600bn by 2015. That is in 5 years rather than 13 for Labour. They are set to increase the debt by twice the amount Labour did, in the longer term. I don't see you complaining about this.

Tue, 2012-09-18 10:38 — mike cobley (not verified)

Must say that this is getting old, y'know, the 'Labour's the source of all our woes, sob, snort!' whinge. What next? - 'Not many people know this but...Labour caused the flooding of New Orleans during Hurrican Katrina, yeah!', or what about 'See that tsunami? - uh huh, Brown's fingers all over it, mate!'

Look, the Blairite New Labour undoubtedly made a serious of stupid mistakes (not least of which was the eagerness with which they revved up the PFI mutlibillion scam engine), including the light-touch regs WRT finance. But it takes more than just a lackadaisical government to create this gargantuan an economic debacle, ie the banks, the brokers, and all the other high priests of ultragreed got in on the act when they realised how naive and pinheaded Blair/Brown were. So the point in, when ranting about the past do try not to rewrite history - Indu Pendant, I'm looking at you!

Tue, 2012-09-18 09:29 — Indu Pendent

George

The coalition inherited a million long term unemployed. How come?

Economic genious Gordon (with a history degree and no relevant work experience) toegther with lackie Balls (so you think he wasnt a lackie?) borrowed 600Bn, including 350Bn before 2008 and the banking crisis. What did we get for the money?

- UK industry declined at its fastest rate since the 1970s (the coalition have stemmed Labour induced industrial decline inspite of the harsh economic climate)
- half of adults leaving school without maths and english GCSE
- £600bn debt
- a massive structural deficit
- reduced North Sea oil well pressures as Labour boosted production to extract the money when oil was cheap
- UK NHS healthcare standards falling behind other countries under Labour
- a million long term unemployed
- no more boom and bust

George, and now you advise on the welfare system which Labour pumped up to win votes ... you are having a laugh.

Tue, 2012-09-18 16:23 — PatM

- The Tories are set to increase debt by £600bn by 2015.
- Before GCSEs, around 60% of pupils left school without an O level in English and Maths. That is apparently what Gove wants to return to.
- Anyway, they are leaving without Cs in GCSE, NOT without GCSEs. There is a difference. And how did the debacle with the marking this year help?
- We have had over 1million unemployed since the early 80s. It was the Tories who got rid of the goal of full employment, in part to help reduce inflation and to break the Unions (most of the job losses in the early 80s were in manufacturing industries with strong Unions)

You seem to think if you repeat untruths enough, they will become true.

Tue, 2012-09-18 09:13 — Vitaly (not verified)

The Tories supported each and every one of New Labour's economic policies. The problem is with the representative democratic system itself - obtaining short term political advantage by bribing (enough of ) the electorate. Other problems include the European Union, expensive wars and Overseas Aid.

Tue, 2012-09-18 09:25 — Indu Pendent

"obtaining short term political advantage by bribing (enough of ) the electorate"

This 100% correct. Its a big problem for the UK political system which the political elite are not willing to discuss.

Tue, 2012-09-18 08:56 — Quattro Man (not verified)

Labour should not have wasted all the money, borrowed more in a boom, sold our Gold at a record low, and left the country broke paying billions £ in interest charges...then maybe these measures would not be necessary. So please, no point bleating now....Labour casued this mess.

Tue, 2012-09-18 18:38 — matthew fox (not verified)

Glad your back SuziQuatroman.

You really need to read up on the facts before ranting. Osborne is on target to spend £70 billion in debt interest charges by 2015.

Is that your definition of success.

Tue, 2012-09-18 10:58 — Gareth

Oh, what a waste all that investment in schools and hospitals was. Shall I take your user name as an indication of what you'd rather have spent the money on?