Does the Treasury want to link benefits to earnings?
Giselle Cory
Date: 21. September 2012 / Category: Commission on Living Standards
Benefits used to be uprated using RPI, a measure of price inflation. This changed to CPI last year. This is also a measure of prices, but crucially it runs lower than RPI. This move generated savings for the Treasury. It has also had an impact on living standards.
For the last few years the UK has been experiencing earnings growth far lower than price inflation (see chart). This has caused a squeeze on living standards. If the rumours are to be believed, it has also prompted the Treasury to ask if more savings can be found by uprating benefits against earnings growth instead of CPI.
Annual change in prices and average earnings, 2001 to 2016
Source: Resolution Foundation analysis of ONS and OBR
Notes: Dashed lines show OBR projections
This seems a bit of an odd idea. Before 2008, earnings growth was far in excess of the CPI. Although the squeeze is set to continue at least into next year, the Office of Budget Responsibility predicts that earnings growth will again jump far higher than price inflation over the next few years. If these projections are accurate and benefits are uprated against average earnings, the Treasury would be left with a bill far in excess of its budget. Of course a proposal to uprate by the lower of earnings or prices may be more appealing for the Treasury.
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