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The impact in 2012-13 of the change to indexation policy
The Institute for Fiscal Studies has published a short paper examining the impacts of recent indexation policies on welfare benefits and pensions. In particular, it looks at the change from using the Retail Prices Index (RPI) (or a deritative of RPI called Rossi) to the Consumer Price Index (CPI).
They state that becase CPI tends to rise more slowly than RPI/Rossi, the CPI indexation is expected to save the Government money in the long run, by reducing nominal increases in benefit payments. Further, this will serve to eorde the rates of benefit payments over time, for example, jobseeker’s allowance for a single person will be £71p/w in 2012-13 under CPI, whereas under Rossi it would £73.25p/w, and the size of this effect will compound indefinitely over time.
The effect of the indexation switch hits those on lower incomes harder as a proportion of income. This pattern is reinforced by the slower uprating of personal tax thresholds. The difference between the rates that benefits and earnings increase will tend to widen the gap between benefit recipients and the rest, as has happened historically, and this will be exacerbated by the change to the indexation rules for benefits.
An exception is with regard to Basic State Pension, which have had a “triple lock” from 2011-12, which means that, in the long run, pensioners should still gain significantly, although perhaps they will not gain by as much if the inflation measure had not been changed.
They conclude by stating:
“Given the importance of indexation policy in determining the future shape of the tax and benefit system, it would be helpful for the Government to set out its thinking on such policy systematically. Why should the Basic State Pension rise at a different rate to working-age benefits? Why should it rise at a different rate to public sector pensions? Why should the employer’s National Insurance threshold rise at a different rate to the employee’s National Insurance threshold? It is important to realise that these questions are separate from the issue of how generous the tax and benefit system should be to particular groups. Justifications for indexation rules should relate to the way in which the generosity of the tax and benefit system to particular groups should change over time. For example, if one thought that the Basic State Pension should be higher, this is an argument for raising the level of the Basic State Pension. It is not, in itself, a good argument for increasing it at a faster rate year-on-year.”
“The difference between the rates that benefits and earnings increase will tend to widen the gap between benefit recipients and the rest, as has happened historically, and this will be exacerbated by the change to the indexation rules for benefits”
In the long run perhaps, but actually CPI has been higher than average earnings increases for a good while now, and with unorthodox monetary policy the fashionable thing, might be for a good while longer, although RPI has been higher still.