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The coalition's £11bn stealth cut: switching from RPI to CPI

A technical quirk will allow the government to skim small amounts each year from lower income households.

What's the biggest cut George Osborne has made as Chancellor? Scroll through the Budget Red Book and the answer may surprise you. There's the removal of child benefit from higher rate taxpayers, clocking in at £2.5bn by the end of the parliament, and there's the time limiting of incapacity benefit which will save, eventually, around £1.2bn. But the biggest cut of all makes both moves look like minnows. It's the switch from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) as the measure used to calculate tax credits, benefits and public service pensions. It will save a colossal £11bn a year by 2015-16 -- and you won't be alone if you know nothing about it.

The switch to CPI is the biggest single stealth move by a chancellor in recent memory. And with the money coming mostly from the budgets of lower income households, it's beholden on us to give it a little more attention. The decision was made in Osborne's first budget as Chancellor in June 2010 and it was effective from April this year, at which point the indexing of all benefits, tax credits and public service pensions switched from the higher RPI measure of inflation (currently at 5.2 percent) to the lower CPI (currently at 4.5).

Although the annual differences in the two measures are small -- on average, the CPI has been around 0.7 percentage points lower than the RPI in the past decade -- they quickly get big over time. Cumulatively, prices under the RPI have risen 53.6 per cent since 1996 and by 35.6 per cent on the CPI. Those are dramatic differences in public spending, and they feed through directly into household budgets. If, for example, you're a working parent who received £500 a month in tax credits in 2010, then under the old system, your payments would rise to around £720 by 2020; under the new rules they'll rise to around £625. Have no doubt that a direct cut in benefits of the same level would have aroused considerably more ire.

To date, what little argument there's been over this issue has come down to technical details about the way the two measures of inflation are calculated. Put simply, there are two main differences. First, the CPI covers a smaller basket of goods than the RPI, excluding, for example, mortgage interest payments, Council Tax, vehicle excise duty and TV licenses. Second, each measure is calculated using a different mathematical formula. Now, as you might suspect, this quickly gets horribly complicated (for the masochists there's a full explanation here). But the important point is that, because of this difference in methods, the RPI would be (currently) around one percentage point higher than the CPI even if it covered the same set of goods. That, say some, means that the RPI overstates inflation.

No doubt the stats geeks among us could stay up all night debating such things. But amidst all the back and forth over "RPI versus CPI", there remains an awkward truth for the CPI gang: the reason the CPI is a poor measure of the cost of living is that was never intended to be one. It was invented by statisticians as a macroeconomic tool, not least for use by central banks, that would give a comparable measure of price-changes across different countries. In fact, the reason the CPI excludes certain important costs related to housing (unlike the RPI) is not that they're unimportant, but that European countries couldn't agree on a comparable way of measuring them.

For anyone who's still with me, it should be clear why this has proved such an effective stealth cut. It's complex, it's slow and it's technical. But in this fog of confusion, something critical is at stake. The impact of changes to indexing rules may not be immediate, but it is profound. As Britain's pensioners discovered to their cost in the 1990s, after Margaret Thatcher broke the earnings-link of the state pension, the result of slower annual increases in income reveals itself only slowly; it takes the form of a strange and uncomfortable sense, growing over time, that you're falling behind.

Of course, ultimately this is a decision made in the pursuit of fiscal sustainability. As the Chancellor is fond of saying, in times like these there are tough decisions to be made. But the truth is this £11bn stealth cut is not tough -- it's easy. It means skimming small amounts each year from the budgets of lower income households, in the hope you'll be out the door before they notice. Had the CPI not existed, the Chancellor would have found himself making these decisions up front, and having to justify them, instead of hiding behind a fortuitous statistical quirk.

If there's a lesson in history here for the Chancellor, it's perhaps to take care. Thatcher's decision on pensions is well remembered, and not fondly. And if Osborne is a fan of retro movies, he might do well to the heed the lessons of that 1990s classic, Office Space. In the film, three humdrum office workers come up with a plan to make billions by skimming a fraction of a cent from every transaction at a major US bank. Within hours the money floods in. But then they take too much and start to panic -- and rightly so. If there's one thing that's dangerous about stealth cuts it's the anger of those who find out.

James Plunkett leads the Resolution Foundation's Commission on Living standards.

James Plunkett is director of policy and development at the Resolution Foundation

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Why isn't Labour putting forward Corbynite candidates?

Despite his successes as a candidate, the organisational victories have gone the way of Corbyn's opponents. 

The contest changes, but the result remains the same: Jeremy Corbyn’s preferred candidate defeated in a parliamentary selection. Afzhal Khan is Labour’s candidate in the Manchester Gorton by-election and the overwhelming favourite to be the seat’s next MP.

Although Khan, an MEP, was one of  the minority of Labour’s European MPs to dissent from a letter from the European parliamentary Labour party calling for Jeremy Corbyn to go in the summer of 2016, he backed Andy Burnham and Tom Watson in 2015, and it is widely believed, fairly or unfairly, that Khan had, as one local activist put it, “the brains to know which way the wind was blowing” rather than being a pukka Corbynite.

For the leader’s office, it was a double defeat;  their preferred candidate, Sam Wheeler, was kept off the longlist, when the party’s Corbynsceptics allied with the party’s BAME leadership to draw up an all ethnic minority shortlist, and Yasmine Dar, their back-up option, was narrowly defeated by Khan among members in Manchester Gorton.

But even when the leadership has got its preferred candidate to the contest, they have been defeated. That even happened in Copeland, where the shortlist was drawn up by Corbynites and designed to advantage Rachel Holliday, the leader’s office preferred candidate.

Why does the Labour left keep losing? Supporters combination of bad luck and bad decisions for the defeat.

In Oldham West, where Michael Meacher, a committed supporter of Jeremy Corbyn’s, was succeeded by Jim McMahon, who voted for Liz Kendall, McMahon was seen to be so far ahead that they had no credible chance of stopping him. Rosena Allin-Khan was a near-perfect candidate to hold the seat of Tooting: a doctor at the local hospital, the seat’s largest employer, with links to both the Polish and Pakistani communities that make up the seat’s biggest minority blocs.  Gillian Troughton, who won the Copeland selection, is a respected local councillor.

But the leadership has also made bad decisions, some claim.  The failure to get a candidate in Manchester Gorton was particularly egregious, as one trade unionist puts it: “We all knew that Gerald was not going to make it [until 2020], they had a local boy with good connections to the trade unions, that contest should have been theirs for the taking”. Instead, they lost control of the selection panel because Jeremy Corbyn missed an NEC meeting – the NEC is hung at present as the Corbynsceptics sacrificed their majority of one to retain the chair – and with it their best chance of taking the seat.

Others close to the leadership point out that for the first year of Corbyn’s leadership, the leader’s office was more preoccupied with the struggle for survival than it was with getting more of its people in. Decisions in by-elections were taken on the hop and often in a way that led to problems later down the line. It made sense to keep Mo Azam, from the party’s left, off the shortlist in Oldham West when Labour MPs were worried for their own seats and about the Ukip effect if Labour selected a minority candidate. But that enraged the party’s minority politicians and led directly to the all-ethnic-minority shortlist in Manchester Gorton.

They also point out that the party's councillor base, from where many candidates are drawn, is still largely Corbynsceptic, though they hope that this will change in the next round of local government selections. (Councillors must go through a reselection process at every election.)

But the biggest shift has very little to do with the Labour leadership. The big victories for the Labour left in internal battles under Ed Miliband were the result of Unite and the GMB working together. Now they are, for various reasons, at odds and the GMB has proven significantly better at working shortlists and campaigning for its members to become MPs.  That helps Corbynsceptics. “The reason why so many of the unions supported Jeremy the first time,” one senior Corbynite argues, “Is they wanted to move the Labour party a little bit to the left. They didn’t want a socialist transformation of the Labour party. And actually if you look at the people getting selected they are not Corbynites, but they are not Blairites either, and that’s what the unions wanted.”

Regardless of why, it means that, two years into Corbyn’s leadership, the Labour left finds itself smaller in parliament than it was at the beginning.  

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.