The implications of a freeze on benefits
It has been widely rumoured that the Chancellor will announce in the Autumn Statement on Wednesday that the value of some benefits will be frozen to reduce the public sector deficit. If this happens, it would be the first time that benefits will not be uprated at least with inflation. The state pension will be exempt from any freeze - an annual rise of the greater of either inflation or average earnings is already promised.
In a way, a freeze would be in keeping with the way in which the value of social security benefits has been determined throughout the Welfare State – that is, without consideration of the amount needed to allow for a minimum standard of living.
In the Monitoring Poverty and Social Exclusion 2012 report published last week we produced an indicator that looked at how the value of benefits had changed since the start of the welfare system (see the graph below). The figures in the graph are adjusted for inflation over time to allow us to carry out this long term comparison.
The graph shows that value of benefits today is radically different to only 10 years ago. Since 2000 the benefit values for pensioners and children have risen considerably whilst those for working-age claimants have remained the same after inflation. This allows us to put the possible freeze in benefits into context and make three observations.
First, freezing state benefits will have different implications for different groups. The real value of benefits for children and pensioners has increased in the last decade, while the value of those for working-age adults has hardly changed since the 1970s.
Secondly, the value of out-of-work benefits for working-age adults has gone up only in line with inflation since 1970s whist earnings have risen much faster. The gap between earnings and benefits, which can be thought of as the ‘incentive’ to exit benefits and enter work, has therefore long been increasing.
Finally, if the logic is that if benefit values are based on the income required to meet a person’s basic needs, then uprating benefits in line with inflation ensures that these needs can still be met as prices increase. However, the graph shows that current benefit values do not reflect the cost of living. The real value of benefits for children has risen by 30 per cent over the ten years to 2012, but this is more to do with the child poverty target than the soaring costs of food or children’s clothes. Likewise the living costs for two pensioners should be similar to that for two working-age adults yet the benefit value for the former is twice that for the latter.
A decision to freeze benefits should only be done after reflecting on current benefit values. It could easily be decided that pensioners should have higher benefits than working-age adults as pensioners should not be forced to work and that working-age benefits should encourage work. The Minimum Income Standard would be a good starting point to estimating the costs of basic needs. But what benefit value is required to meet basic needs and encourage work? It appears that no such considerations have been made.