Some of us have been pointing out the RPI/CPI cheat for years – ever since the Coalition Government initiated it, in fact.
Now, thanks to this Guardian report, we can see that Conservative-led governments have avoided spending tens of billions by this measure – and the Tories are expected to dodge £40 billion more by 2020.
The Tories have claimed that their ‘austerity’ measures have cut the deficit from around £130 billion in 2010-11 to around £98 billion in 2014-15. Perhaps we can conclude that the change from RPI to CPI is responsible for all the deficit reduction that we have seen since the Conservatives came into office in 2010.
In that case: Why have the poor been forced to endure humiliating and life-threatening austerity cuts to their livelihoods?
The story begins with a single paragraph in the emergency budget a few weeks after the 2010 general election. Buried in its 100 pages was a small section stating that future benefits, tax credits and public sector pensions for retired emergency workers, civil servants, council employees and NHS staff would rise in line with a different measure of inflation: the consumer price index (CPI). Previously, the default increase was the retail price index, RPI – which has historically averaged about 1% higher.
By reducing the increase in payments each year, Treasury documents admitted the change would save them £15bn over the life of the last parliament. But in the frenzy of the time, facing down the worst recession since the Great Depression, attention was largely diverted. And nobody warned the public how the cost of this policy would keep multiplying beyond 2015.
The following year, the Treasury extended the reduced inflation rate to thresholds for income tax, national insurance contributions and inheritance tax, also introducing more exceptions and delays. This decision, more complex than the last, was even less remarked upon. The impact on so many people in the UK, though, was significant.
Take jobseeker’s allowance for a single person of 25 or older, which is currently £73.10 a week. Robert Joyce at the Institute of Fiscal Studies calculates that if index-linking remained at the old rate, it would have risen to £87.75 by the end of this parliament. But under the new policy the weekly payment will rise by slightly less each year. By the next election in 2020, the cumulative effect will be a weekly payment of £80.70 – or £366 a year lower, says Joyce.
The same is true of almost every one of the benefits and tax credits, and for millions claiming pensions for public service (for whom the triple-locked state pension does not apply).
There are no official calculations of the combined impact of these changes. But using the Office for Budget Responsibility’s (OBR’s) most up-to-date estimates the inflation switch will save the Treasury more than £40bn over this parliament.
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