After the thaw: the future of uprating

11 September 2015

 

The Summer Budget committed to freezing the value of a number of working-age benefits for four years from April 2016. Following this freeze, Secretary of State for Work and Pensions, Iain Duncan Smith, expects these benefits to be uprated in line with inflation.

An inflation link will signal the return to normality for a vast majority of benefits. Governments have increased benefits in line with inflation since 1980. In 2010, the Coalition moved from RPI and Rossi measurements of inflation to CPI on the basis that it “provides a more appropriate measure of benefit and pension recipients’ inflation experiences than RPI.” This is probably the case as CPI reflects people’s abilities to change consumption habits in light of changing prices.

But a one-size-fits-all approach to uprating fails to recognise the range of purposes different benefits serve. Broadly speaking, social security payments fulfill three functions:

  1. Income replacement (such as Jobseeker’s Allowance (JSA) and Employment and Support Allowance), to provide an income to those with low or no incomes.
  2. Income supplement (such as Working Tax Credit), to support those in low-paid work.
  3. Contribution to extra costs (such as Personal Independence Payment (PIP), Attendance Allowance, Child Benefit and Local Housing Allowance), to compensate individuals for specific costs.

Understanding these nuanced objectives raises questions over the existing policy. JSA, for instance, is designed to function in a different way to PIP: the first replaces an income for those temporarily out of work; the second is designed to cover the costs engendered by a disability or illness. Working Tax Credit, meanwhile, is intended to ensure that work pays and so uprating by prices rather than earnings may dilute this incentive.

Academics and policymakers are alert to these concerns. John Austin and Jill Leyland have argued that “[f]ew would dispute the need for producing different price indices for different purposes—it is unlikely that any single index would be suitable for all purposes.”

A sustainable approach centred on the purpose of the benefit may see greater generosity in some areas, alongside the curtailing of expenditure in others. Reform has previously argued that replacing the UK’s ‘triple lock’ on the State Pension with a relative-earnings link would reduce the debt burden by 26 per cent of GDP by the 2060s, without eroding the value of the State Pension relative to prices.

Government should explore developing more appropriate uprating mechanisms for other benefits. Exactly what shape this should take will be the subject of a forthcoming Reform paper. But it is clear that following the thawing of the freeze, the Government should design uprating policy to cohere with the functions of benefits in a sustainable manner.

Alex Hitchcock, Researcher, Reform

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