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Today the September 2010 inflation numbers were published by the Office for National Statistics. The September inflation figures are particularly important because they are typically used for the annual inflation adjustments to many taxes, benefits and tax credits.
In the June Budget, the Chancellor announced that benefits, tax credits and public service pensions would be uprated with the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI) (which has been used to uprate universal benefits) or Rossi Index (which has been used to uprate means-tested benefits) from April 2011 (more generous increases are to apply to the Basic State Pension and the Pension Credit). This September, CPI inflation was 3.1% , the RPI inflation was 4.6%, and Rossi inflation was 4.8%.
The CPI tends to give a lower measure of inflation than both the RPI and Rossi indices. This change in indexation rules is forecast to save the government £5.8 billion in 2014-15 and increasing amounts thereafter. This was likely an important motive for the change, but the government has also claimed that the CPI provided a better measure of benefit recipients' "inflation experience".
In late August we published an evaluation of this claim. Today we publish an improved version of this analysis, in which we consider alternative assumptions, use the data more effectively and consider announced future changes to the benefit system rather than just looking at the benefit system as it currently stands. The full list of changes between this new version and our original report can be found in Appendix E of our report.
In comparing these indices there are two key considerations. First, when the prices of goods and services change, households can partially avoid price rises by substituting away from goods that have become relatively more expensive and towards goods that have become relatively cheaper. As we previously observed, the way the CPI is calculated is designed to attempt to take some account of this (given certain assumptions about the way consumers behave) whereas the RPI and Rossi indices are not. In this respect, the CPI is a superior measure. The ONS reports that this is the most important reason for the difference between the CPI and the RPI.
Second, the CPI also differs from the other indices in terms of the goods and services it includes. Most importantly, compared to the RPI, the CPI excludes mortgage interest and Council Tax costs, and compared to Rossi, which already excludes these items, the CPI includes rents.
Do the differences in the coverage of the CPI make it a better measure of inflation for benefit recipients than the current combination of the RPI and Rossi? To assess this we use household survey data to look at the proportion of recipient households who could be considered insulated from changes in both mortgage interest and Council Tax costs. In this exercise, we only look at working age households, as pensions are subject to different indexation rules.
At present, it appears that the vast majority of those on RPI-linked benefits are not insulated from mortgage interest and council tax changes. This group is largely made up of households receiving only Child Benefit, some of whom might be affluent households.
Those on means-tested benefits that have hitherto been indexed to the Rossi are largely insulated from changes in mortgage interest and Council Tax, but as both Rossi and the CPI exclude these costs, this does not favour one or the other. At present the exclusion of rents from Rossi - an item included in the CPI - does favour the Rossi, as the vast majority of those receiving Rossi-linked benefits appear insulated from rental costs (in most cases because they receive Housing Benefit).This means that under current benefit rules the coverage of the CPI does not look like an improvement over the status quo.
However, changes to the benefit system announced in the Budget, or since, alter this assessment going forward. From April 2013, for instance, Housing Benefit for those renting in the private sector (Local Housing Allowance) will no longer be linked to local rents but will instead be uprated using the CPI. This means that fewer households receiving means-tested benefits will be insulated from changes in rental costs than before (this is something we consider in our revised analysis). A cap on total benefit payments linked to average family earnings announced recently might have a similar effect. These changes may make the inclusion of rental costs in the index used to uprate means-tested benefits more appropriate, and so, given these changes, the case for the Rossi over the CPI - on a coverage basis - will weaken.
To summarise, the fact that it accounts for consumers' ability to substitute between goods and services favours the CPI. For those on universal benefits, the coverage of goods and services in the RPI is superior to the CPI. For those on means-tested benefits, with whom we may be more concerned, the Rossi's coverage of goods and services is superior to the CPI's given the current benefit system, but the case against the CPI may weaken, once currently announced changes to the system take full effect.
Our analysis here has been concerned solely with the technical question of which index is a better measure of the inflation experience of households receiving benefits. This is, of course, an entirely separate issue from the broader question of how generous one thinks benefits should be.
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Cutting the deficit: three years down, five to go?
The UK is in the fourth year of a planned eight-year fiscal tightening. Following further announcements made in Budget 2013, this fiscal consolidation is now forecast to total £143 billion by 2017–18. The UK is intending the fourth largest fiscal consolidation among the 29 advanced economies for which comparable data are available. By the end of this financial year, half of the total consolidation is expected to have been implemented. However, within this tax increases and cuts to investment spending have been relatively front-loaded, while cuts to welfare spending and other non-investment spending have been relatively back-loaded.
The March Budget forecast that borrowing would fall by £0.1 billion from £121.0 billion in 2011–12 to £120.9 billion in 2012–13. On Tuesday, the Office for National Statistics is due to release its first estimate of public sector net borrowing in March 2013 and, therefore, for the whole of 2012–13. Borrowing could easily end up being higher or lower than it was in the previous year, either due to backwards revisions, the uncertainty inherent in forecasting borrowing even a month in advance, or both. However, whether borrowing is slightly up or down in cash terms is economically irrelevant. Either way, the bigger picture is that having fallen by roughly a quarter between 2009–10 and 2011–12, borrowing is forecast to be broadly constant through to 2013–14.
Women working in their sixties: why have employment rates been rising?
Employment rates through the recession have been remarkably robust, with today’s ONS figures showing employment remaining close to 30 million. The young have experienced historically low employment rates and high unemployment rates but the employment rate of women aged 60 to 64 has increased as fast since 2010 as it did during the 2000s. An important explanation is the gradual increase in the state pension age for women since 2010, which has led to more older women being in paid work. Without this policy change, the employment rate for 60 to 64 year women would have been broadly flat since 2010.