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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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I'm playing sports again – but things just aren't cricket

I start the new season with red wine stains on my cap, a dodgy shoulder and a burnt nostril.

I’ve put my name up for the first match of the season, playing for that team of redoubtable cricketers, the Rain Men, named after their founder Marcus Berkmann’s book about a team of middle-aged and, er, “mixed-ability” players. The book was first published twenty years ago. Feel free to do some rudimentary maths.

I myself haven’t played for three years. I know this because when I go to get some new contact lenses – I don’t like the idea of running around in glasses, or having a cricket ball lodge them into my eyeballs – I am told I have not bought any since 2013. Yes, that would figure. I couldn’t play for much of 2013, and all of 2014, because two weekends a month I was busy with my children, and the other two I was busy with my lover. A game takes up a whole Sunday – one is committed, including travel and the post-match drink, for about ten hours, and that is too long to spend apart from your loved one, unless of course you are married or otherwise permanently settled and you see them all the time anyway.

In 2015 that restriction was lifted for me, but for some reason I spent that year being too sad to think about playing cricket and also far too unfit. I would occasionally walk long distances and do a few dozen desultory lifts of the dumb-bells in order to achieve even the beginnings of some kind of muscular definition, but in the end the lassitude took over and I thought that maybe the team, however ageing, could do without someone who gets a bit winded when walking down stairs.

Then a brief moment of optimism a couple of weeks ago, combined with a ray of what may possibly have been sunshine, inspired me to rejoin the fold. The team’s meticulously kept records, known among the members as “Sad Stats”, inform me that I have played only eight games for them; when one has played ten, one is eligible for a Rain Men cap, a properly made thing whose design and hooped colours are, in their air of having come from another age, seemingly designed specifically to enrage fast bowlers.

The cap I have says “Antigua, WI”. It’s a battered thing I bought on the island a few years ago, now stained, not sure how, with red wine, but which I will say is my own, fearlessly shed blood, should anyone ever ask. The idea is that, if I wear this cap, some idiot will think I have actually played for Antigua and am thus a force to be reckoned with. However, after a few deliveries, I suspect the opposition has decided that the “WI” stands for Women’s Institute rather than West Indies.

So I start my fitness training a week or so before the match. This involves a walk into town for dinner, followed by a single lift of the dumb-bells before I realise that The Thing That Is Wrong With My Right Shoulder is as bad as it was when it started, about a month ago. What is wrong with it? I can’t move my arm above shoulder height, but I can’t think of any strain I could have put on it. Can you get cancer of the shoulder?

Well, this rules out bowling, except bowling is already ruled out on the grounds that I can no longer bowl, even with a fully rotational shoulder joint. Which in our case we have not got, to quote Henry Reed’s “Naming of Parts”.

In the end, I confine my preparations to a few practice shots with the bat on the back terrace while listening to The Archers. Strangely, the bat seems to have put on a lot of weight since I last held it. I tried practising in front of the mirror in the living room, but as I can only see my head in it, this is not much use except for practising my face. On the terrace, I attempt a pull shot with a fag in my mouth, which clenches so as to make me burn my right nostril really rather badly. A week later, when I actually play, it is still sore to the touch.

As for the game . . . well, it’s an odd one. We manage to eke out a draw, and as for my own contribution, the less said about that, the better. But at least I don’t drop any catches and, even though it causes my shoulder agony, I stop a few balls in the field. The ground itself, however, is right in the shadow of the Didcot A power station, in whose ruins are still at least three bodies of the men who were caught there when it collapsed in February. Throughout the game, lorries tip their burdens of mangled metal on enormous scrapheaps. It puts things in perspective. But look in the other direction, and rapidly backwards and forwards the early bees are assaulting and fumbling the flowers. 

Nicholas Lezard is a literary critic for the Guardian and also writes for the Independent. He writes the Down and Out in London column for the New Statesman.

This article first appeared in the 19 May 2016 issue of the New Statesman, The Great Huckster