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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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Empty highs: why throwaway plastic goes hand in hand with bankrupt consumerism

We are in the throes of a terrible addiction to stuff.

A University of California study revealed this week that mankind has produced more than nine billion tonnes of plastic since the 1950s, with almost all of it ending up in landfill or the ocean. With the terrible effects of our decades-long addiction to throwaway packaging becoming increasingly apparent, it’s clear that a fresh approach is needed.

In April 2010, David Cameron set out his vision for Britain in the Conservative Party’s manifesto. Keen to show that the Tories had turned away from the "I’m Alright Jack" individualism of the 1980s, Cameron sought to fashion a softer, more inclusive brand.

The good society, Cameron argued, embraced much higher levels of personal, professional, civic and corporate responsibility. There was such a thing as society, and we’d all do well to talk to our neighbours a bit more. The Big Society, however, was roundly derided as a smokescreen for an aggressive tightening of the Government purse strings. And on the advice of his 2015 election fixer Lynton Crosby, Cameron later dropped it in favour of well-worn lines about economic security and jobs.   

While most would argue that the Big Society failed to amount to much, Cameron was at least right about one thing. We are happiest when we are part of something bigger than ourselves. No matter how much the credit card companies try to convince us otherwise, mindless individualism won’t make us nearly as contented as we’re led to believe by big conglomerates.

By any measure, we are in the throes of a terrible addiction to stuff. As a nation, we have run up unsecured debts of more than £350bn, which works out at £13,000 per household. Fuelled by a toxic mix of readily available credit and interest rates at historic lows, we cripple ourselves financially to feel the empty high derived from acquiring yet more stuff.

Purchasing has become a leisure pursuit, ensuring the rate at which we acquire new stuff exceeds the rate at which we can find somewhere to put it. Burdened with ever increasing amounts of stuff, consumers are forced to outsource their storage. The UK didn’t have a self-storage industry 30 years ago, but now it is the largest in Europe.

With the personal debt mountain soaring, we’d all do well to realise that we will never have enough of something we don’t need.

The growth of rampant consumerism has coincided with an explosion in demand for single-use plastic. Like the superfluous possessions we acquire, throwaway plastic packaging helps satisfy our desire to get exactly what we want without having any thought for the long-term consequences. Plastic packaging is easy and convenient, but ultimately, will do us immense harm.

In 1950, close to 1.5 million tonnes of plastic was produced globally. Today, the figure stands at more than 320 million tonnes. The vast majority of our plastic waste either ends up in landfill or the ocean, and our failure to kick the plastic habit has put is in the ludicrous position where there is set to be more plastic than fish in global seas by 2050.

There is also growing evidence that our penchant for endless throwaway plastic might be storing up serious health problems for our children later down the line. According to a University of Ghent study published earlier this year, British seafood eaters risk ingesting up to 11,000 pieces of plastic each year. The report followed UN warnings last year that cancer-causing chemicals from plastic are becoming increasingly present in the food chain.

Something must give. Unsustainable as our reliance on fast credit to finance ever more stuff, our addiction to plastic packaging is storing up serious problems for future generations. The instant gratification society, high on the dopamine rush that fades so quickly after acquiring yet another material asset, is doomed unless decisive action is forthcoming.

So what is to be done? The 2016 US documentary Minimalism points to a smarter way forward. Minimalism follows the lives of ordinary people who have shunned the rat race in favour of a simpler life with less stuff and less stress. The most poignant bit of the film features ex-broker AJ Leon recounting how he chose to forgo the glamour and riches of Wall Street for a simpler life. After a meteoric rise to the top of his profession, Leon decided to jack it all in for a more fulfilling existence.

While challenging the view that to be a citizen is to be a consumer is easier said than done, there are small changes that we can enact today that will make a huge difference. We simply have no choice but to dramatically reduce the amount of plastic that we can consume. If we don’t, we may soon have to contend with the ocean being home to more plastic than fish.

Like plastic, our bloated consumer culture is a disaster waiting to happen. There must be a better way.

Sian Sutherland is co-founder of campaign group A Plastic Planet which is campaigning for a plastic free-aisle in supermarkets.

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