A government on a mission to fix what’s broken in 2020s Britain cannot easily ignore our income safety net. It is in tatters. We can all see the results of 14 years in which the means-tested income levels guaranteed to people of working age rose much more slowly than minimum living costs. This has coincided with new arbitrary restrictions on entitlements (like the two child limit), and claimants too often having had to go into debt while waiting for Universal Credit. An income safety net that once just about allowed families to scrape by is now leaving many having to fall back on charity just to feed their children.
I see the impact regularly when volunteering at my local Citizens Advice, where requests for food bank referrals commonly come not just from households facing a one-off crisis but from those who regularly run out of food simply because their income is too low. But don’t take my word for it. The Work and Pensions Committee recently produced a damning report on benefits and set out a wide range of evidence suggesting that “benefit levels are too low, and that claimants are not able to afford daily living costs”. The chair of that committee, Stephen Timms, is now Minister of State at the DWP.
Mr Timms does not have the power to order the increases in benefit levels that he knows are urgently needed, although Rachel Reeves, who does have this power, is a former shadow work and pensions secretary who is well aware of the situation. The worst effects of the “living standards crisis” will not go away on their own, but require a significant boost to the incomes of those who have least.
Of course we know that the substantial sums needed to make this happen will not appear overnight. Labour has made it clear that transformative improvements in public services and public spending can only come with a return to healthy economic growth. But growth if and when it comes will not feed through automatically into improved benefits. Government needs to think in advance about how to design a system to ensure this happens.
An obvious precedent is pensions. In the 1980s and 1990s, pensioners missed out on rapid economic growth with a state pension linked only to prices, and therefore providing a diminishing proportion of former earnings. The Turner Commission, reporting in 2005, initiated a new settlement leading to the pensions triple lock, which has intentionally increased pensions when earnings rise, and also accidentally allowed them to make up lost ground, by rising faster than earnings over the past 15 years. Accidentally, because before the triple lock was devised in 2007, earnings had almost always risen faster than prices and faster than 2.5%, but since that time this has often not been the case, so locking pension increases to the highest of these three in each year causes pensions to rise faster than each of the measures over time. Whether or not a social security commission is now established to reach a new settlement for working age benefits, it is worth thinking about what kind of mechanism might lock in a link between future economic growth and increases in safety-net benefits.
Much emphasis, by the Select Committee and by organisations such as the Resolution Foundation, has been on producing firmer commitments to uprating at least by inflation. This clearly has to be a starting point. In seven of the 14 years since 2010, upratings of the main benefit rates have been below inflation. Even in the past four years, when index-linking has mainly been restored, some elements such as Local Housing Allowances (the maximum private rent that can be covered) have undergone periodic freezes. Such penny-pinching measures make the poorest families poorer and need to be explicitly stopped. A fair uprating system needs to be made the legislated default.
But clearly if upratings only follow prices, this simply perpetuates the inadequate levels of income, relative to living costs, that so many claimants now face. Could earnings uprating be the best way of improving the levels of working age benefits just as it has for pensions?
There’s a slight snag in this idea: earnings growth has all but ground to a halt. If we now expect healthy and steady economic growth to resume, a simple earnings link could ensure that growing prosperity is evenly shared, including by lifting the incomes of those who have least. But unlike for Turner in the mid-2000s, such an assumption seems wildly optimistic. The Office for Budget Responsibility forecasts that up to the later part of this decade, earnings will be growing annually by 1% or less in real terms. An earnings link in this case would increase the value of benefits, but painfully slowly. As shown in the graph below, were benefits to increase by 1% annually in real terms, it would take until the middle of this century for the safety net for single people just to return to its 2010 level relative to living costs. And as only 40% of what was needed, defined by the Minimum Income Standard, this is already vastly inadequate. To get to 50%, which can be seen as the threshold of deep poverty, would take until late in this century, and to get to 75%, a threshold below which the risk of hardship has been shown to be high, would take until the early 22nd century…
At this rate, the safety-net for a single person would not reach three-quarters of the Minimum Income Standard (a threshold below which the risk of hardship is particularly high) until early in the 22nd century.
The alternative would be to make a bolder commitment to use part of the fruits of future growth to raise the incomes of the worst-off faster than average earnings. Designing a policy that gives greatest increases to benefits during periods of growth is likely to add to its political feasibility. For example, a formula could automatically increase the standard allowance by one percentage point above the growth in average earnings or one percentage point above the growth in prices, whichever is the higher. This would still produce only a gradual rate of improvement, but would guarantee continuous growth that would transform the adequacy of the safety net over a generation. Of course, if earnings growth were to return to previous, higher levels, progress would not be so painfully slow.
This creates a case for a formula that diverts the fruits of growth disproportionately to those who have the least. For example, it could guarantee that benefits always increase by at least one percentage point above inflation and by at least one percentage point above earnings. If such a double lock for working age benefits produced say an average 2% a year real-terms increase, the ground lost since 2010 would still take over a decade to make up, but at least there would be steady progress, to which one-off measures could potentially add. The important thing is to put benefit cuts systematically into reverse.
I see the impact regularly when volunteering at my local Citizens Advice, where requests for food bank referrals commonly come not just from households facing a one-off crisis but from those who regularly run out of food simply because their income is too low. But don’t take my word for it. The Work and Pensions Committee recently produced a damning report on benefits and set out a wide range of evidence suggesting that “benefit levels are too low, and that claimants are not able to afford daily living costs”. The chair of that committee, Stephen Timms, is now Minister of State at the DWP.
Mr Timms does not have the power to order the increases in benefit levels that he knows are urgently needed, although Rachel Reeves, who does have this power, is a former shadow work and pensions secretary who is well aware of the situation. The worst effects of the “living standards crisis” will not go away on their own, but require a significant boost to the incomes of those who have least.
Of course we know that the substantial sums needed to make this happen will not appear overnight. Labour has made it clear that transformative improvements in public services and public spending can only come with a return to healthy economic growth. But growth if and when it comes will not feed through automatically into improved benefits. Government needs to think in advance about how to design a system to ensure this happens.
An obvious precedent is pensions. In the 1980s and 1990s, pensioners missed out on rapid economic growth with a state pension linked only to prices, and therefore providing a diminishing proportion of former earnings. The Turner Commission, reporting in 2005, initiated a new settlement leading to the pensions triple lock, which has intentionally increased pensions when earnings rise, and also accidentally allowed them to make up lost ground, by rising faster than earnings over the past 15 years. Accidentally, because before the triple lock was devised in 2007, earnings had almost always risen faster than prices and faster than 2.5%, but since that time this has often not been the case, so locking pension increases to the highest of these three in each year causes pensions to rise faster than each of the measures over time. Whether or not a social security commission is now established to reach a new settlement for working age benefits, it is worth thinking about what kind of mechanism might lock in a link between future economic growth and increases in safety-net benefits.
Much emphasis, by the Select Committee and by organisations such as the Resolution Foundation, has been on producing firmer commitments to uprating at least by inflation. This clearly has to be a starting point. In seven of the 14 years since 2010, upratings of the main benefit rates have been below inflation. Even in the past four years, when index-linking has mainly been restored, some elements such as Local Housing Allowances (the maximum private rent that can be covered) have undergone periodic freezes. Such penny-pinching measures make the poorest families poorer and need to be explicitly stopped. A fair uprating system needs to be made the legislated default.
But clearly if upratings only follow prices, this simply perpetuates the inadequate levels of income, relative to living costs, that so many claimants now face. Could earnings uprating be the best way of improving the levels of working age benefits just as it has for pensions?
There’s a slight snag in this idea: earnings growth has all but ground to a halt. If we now expect healthy and steady economic growth to resume, a simple earnings link could ensure that growing prosperity is evenly shared, including by lifting the incomes of those who have least. But unlike for Turner in the mid-2000s, such an assumption seems wildly optimistic. The Office for Budget Responsibility forecasts that up to the later part of this decade, earnings will be growing annually by 1% or less in real terms. An earnings link in this case would increase the value of benefits, but painfully slowly. As shown in the graph below, were benefits to increase by 1% annually in real terms, it would take until the middle of this century for the safety net for single people just to return to its 2010 level relative to living costs. And as only 40% of what was needed, defined by the Minimum Income Standard, this is already vastly inadequate. To get to 50%, which can be seen as the threshold of deep poverty, would take until late in this century, and to get to 75%, a threshold below which the risk of hardship has been shown to be high, would take until the early 22nd century…
At this rate, the safety-net for a single person would not reach three-quarters of the Minimum Income Standard (a threshold below which the risk of hardship is particularly high) until early in the 22nd century.
The alternative would be to make a bolder commitment to use part of the fruits of future growth to raise the incomes of the worst-off faster than average earnings. Designing a policy that gives greatest increases to benefits during periods of growth is likely to add to its political feasibility. For example, a formula could automatically increase the standard allowance by one percentage point above the growth in average earnings or one percentage point above the growth in prices, whichever is the higher. This would still produce only a gradual rate of improvement, but would guarantee continuous growth that would transform the adequacy of the safety net over a generation. Of course, if earnings growth were to return to previous, higher levels, progress would not be so painfully slow.
This creates a case for a formula that diverts the fruits of growth disproportionately to those who have the least. For example, it could guarantee that benefits always increase by at least one percentage point above inflation and by at least one percentage point above earnings. If such a double lock for working age benefits produced say an average 2% a year real-terms increase, the ground lost since 2010 would still take over a decade to make up, but at least there would be steady progress, to which one-off measures could potentially add. The important thing is to put benefit cuts systematically into reverse.
READ MORE