11 Nov 2011

Will benefits rise more slowly now 50p tax rate is to stay?

Today’s remarks by both David Cameron and George Osborne that the Chancellor won’t abolish the 50p tax rate in his autumn statement at the end of this month (levied on incomes of more than £150,000) have an important knock-on effect. 

They surely make it a lot more likely that Osborne will announce that he won’t be uprating benefits by the full 5.2 per cent, as should be dictated by the September inflation rate (measured nowadays by the Consumer Prices Index – CPI).

The 5.2% CPI figure for September was an unfortunate peak in the inflation figures, and a full uprating of all benefits could prove exceedingly costly to the Treasury.

For weeks ministers have been debating whether to go ahead with a full 5.2 per cent rating, with intense discussions involving the Treasury and the Department and Work and Pensions (DWP).

It’s been presented in the media as a straight row between the DWP and the Treasury, though my understanding is that the argument is rather less heated than that, and rather more complicated.

The Welfare Secretary Iain Duncan Smith and his deputy Chris Grayling both sympathise with the Chancellor’s determination to reduce the deficit.  On the other hand ministers and officials in both departments fear that not uprating benefits in full may have wider adverse consequences. 

Income from benefits is ploughed almost immediately into consumer spending, so a lower than expected uprating might have a deflationary effect on a currently very fragile economy.

Ministers are considering several options to avoid a full uprating, though they are sticking with their commitment to increase pensions by the full 5.2 per cent.

But it would have been politically disastrous for George Osborne to announce in his autumn statement what would amount to cuts in real terms for the poor, whilst also cuts in tax for the reach.  Not least it could blow the coalition apart, since the Liberal Democrats have strong reservations about both policies. 

Cuts in the 50p rate have today been ruled out for the time being, pending next year’s HMRC report into how much money the new 50p rate raises.  So now some kind of cut in the benefits rating is much more feasible.

One option would be to freeze all benefits apart from pensions, but that would cause a huge row. 

Another option would be to uprate benefits in line with the rise in earnings to September, so that people on benefits would find their incomes rising in line with the rest of the population. 

A third alternative would be to raise benefits by an average of CPI over a certain period – the six months to September, say, which would mean an uprating of about 4.5 per cent.

Those involved in the benefit discussions in Whitehall are aware just how big a decision this is.  They know they have to think very carefully about the kind of messages whatever they decide might send about the government’s various commitments: to cutting the deficit; to protecting those worst off; and to growth.

Follow Michael Crick on Twitter: @MichaelLCrick

7 reader comments

  1. Philip says:

    Since the very rich avoid tax anyway, this is likely to be very regressive. It will be another test of the LibDems as to whether they will put up with it. But we must ensure that fiscal rectitude defeats all attempts to revive the economy.

  2. Gary says:

    Many of the Limp Dems on the cabinet are closet tories, so don’t hold your breath on this one.

  3. e says:

    I can see this is a difficult equation; and there’s a lot at stake, but no doubt it can and will be computed. Economic equilibrium is achievable for all who count…

    If the balance between benefit income and rising prices can be optimised, any cost to the economy in lost demand might eventually be offset by rising death rates among benefit claimants…..There’s the possibility of the electorate getting a bit upset about rates of malnutrition among the disenfranchised…..but the “intelligent” know that the Almighty “market forces” for which no “body” is responsible is the cause. Clever media folk will continue to diligently portray the faults of the individuals losing out, thus equilibrium in telly land is achieved.

    1. Charles Jurcich says:

      It always amazes me that when media commentators focus on unemployment, specifically the “entitlement culture” myth, they always forget to tell everyone that 5.5% unemployment is always created by the govt and the BoE out of fear of inflation.

      Why do the media never talk about the NAIRU?

      1. e says:

        Because they trust the script?

  4. richard says:

    Osborne and Co. are slippery customers. First they reduce upgrading from RPI to CPI, then attempt to reduce it further. You really can’t trust them. They may not dare cut the top rate of tax yet, but they will do so as soon as they can, making the very rich even richer, while those on benefits are categorised as workshy scroungers – a grotesque accusation when you think that it is government policies which have thrown large numbers of people out of work and onto benefits in the first place

  5. holly bryant says:

    they say the economy is geting better but its not i should know im so dam poor becouse i have not been able to find a job. when my daughter looks at me and says i guess we arnt haveing christmas this year becouse i have to fig wher im going to find money to pay bills and food and now they want to take moore money from use that we dont have thats messed up.

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