Notes
Benefit rates are set to rise substantially next month. State pensions will rise by 5%, while means-tested payments, such as Jobseeker’s Allowance, will rise by 6.3%. The new rates, based on the Retail Prices Index (RPI), were determined in September 2008, when inflation peaked, but now represent significant increases in real terms.

Higher welfare spending will push the public finances even further into the red. The prospect of yet more government borrowing and tax rises in the future could undermine economic confidence and deter investment in the UK.

Moreover, at a time when many workers are being made redundant and others are facing pay cuts, higher out-of-work benefits will reduce the financial incentives for jobless people to take employment, particularly since in many cases they will also be entitled to Housing Benefit, which pays their rent. Combined with the minimum wage and restrictive employment regulation, this is likely to make the surge in unemployment even worse and condemn many more people to a life of welfare dependency.

It could be said that “rules are rules” and it is just an unfortunate coincidence that benefit levels were set in a “freak” month for RPI. However, imagine inflation had fallen to -5% last September before rising to become positive again in April 2009. Is it credible that the government would have imposed benefit cuts?

Richard-Wellings-2012b.JPG

Director

Richard Wellings was educated at Oxford and the London School of Economics, completing a PhD on transport and environmental policy at the latter in 2004. He joined the Institute in 2006 as Deputy Editorial Director. Richard is the author, co-author or editor of several papers, books and reports, including Towards Better Transport (Policy Exchange, 2008), A Beginner’s Guide to Liberty (Adam Smith Institute, 2009), High Speed 2: The Next Government Project Disaster? (IEA , 2011) and Which Road Ahead - Government or Market? (IEA, 2012). He is a Senior Fellow of the Cobden Centre and the Economic Policy Centre.

16 thoughts on “Are large benefit increases wise in a recession?”

  1. Posted 12/03/2009 at 10:55 | Permalink

    This policy also has an impact on social housing rents, which have to rise by 1% above the September RPI figure. Social landlords are therefore forced to put their rents up by 6.5% in April, with all the consequences this has for work incentives and the cost of Housing Benefit. This is happening at a time when private sector rents in some parts of the country are falling.

  2. Posted 12/03/2009 at 10:55 | Permalink

    This policy also has an impact on social housing rents, which have to rise by 1% above the September RPI figure. Social landlords are therefore forced to put their rents up by 6.5% in April, with all the consequences this has for work incentives and the cost of Housing Benefit. This is happening at a time when private sector rents in some parts of the country are falling.

  3. Posted 12/03/2009 at 11:16 | Permalink

    And the problem of social housing rent is all rigidly locked into the system because so-called social landlords obtain their long-term building finance on the assumption that their rents are closely tied to RPI, do they not?

  4. Posted 12/03/2009 at 11:16 | Permalink

    And the problem of social housing rent is all rigidly locked into the system because so-called social landlords obtain their long-term building finance on the assumption that their rents are closely tied to RPI, do they not?

  5. Posted 12/03/2009 at 15:52 | Permalink

    One of the reasons politicians are so concerned to avoid deflation is that they know how difficult it would be to cut worker’s nominal wage rates. But if nominal wage rates stay the same, during a deflation ‘real’ wage rates would be rising, with horrendous implications for unemployment.

  6. Posted 12/03/2009 at 15:52 | Permalink

    One of the reasons politicians are so concerned to avoid deflation is that they know how difficult it would be to cut worker’s nominal wage rates. But if nominal wage rates stay the same, during a deflation ‘real’ wage rates would be rising, with horrendous implications for unemployment.

  7. Posted 12/03/2009 at 16:21 | Permalink

    Philip, you’re right, and revenue subsidy also depends on rent levels. Social landlords have virtually no flexibility.

    Returning to Richard’s point on benefit levels, I think it is very troubling that we are now being told by government that higher benefit levels are inherently good because they form part of a financial stimulus. The problem, of course, is that this spending all too easily becomes permanent.

  8. Posted 12/03/2009 at 16:21 | Permalink

    Philip, you’re right, and revenue subsidy also depends on rent levels. Social landlords have virtually no flexibility.

    Returning to Richard’s point on benefit levels, I think it is very troubling that we are now being told by government that higher benefit levels are inherently good because they form part of a financial stimulus. The problem, of course, is that this spending all too easily becomes permanent.

  9. Posted 13/03/2009 at 10:46 | Permalink

    I’ve just read in ‘Inside Housing’ that the government will fund half the proposed rent increase. The main response by local authorities is to complain at the cost of sending out revised rent increase letters and whether the government will pay. Its not just the tenants who are dependent!

  10. Posted 13/03/2009 at 10:46 | Permalink

    I’ve just read in ‘Inside Housing’ that the government will fund half the proposed rent increase. The main response by local authorities is to complain at the cost of sending out revised rent increase letters and whether the government will pay. Its not just the tenants who are dependent!

  11. Posted 01/04/2009 at 11:46 | Permalink

    “Are large benefit increases wise in a recession?” It rather depends who you are. If you are a politician they are positively sage-like. You can present yourself as the generous benefactor, helping out the poorest, while additional expenditure is deferred until the future, after which you have already won your election, or lost it and left the mess to your opponent to clear up.

    Meanwhile those whose jobs or businesses are destroyed are The Forgotten Men, for it is far harder to plot the causal link between their suffering and government spending than it is to point to a beneficiary on an extra £5 a week.

  12. Posted 01/04/2009 at 11:46 | Permalink

    “Are large benefit increases wise in a recession?” It rather depends who you are. If you are a politician they are positively sage-like. You can present yourself as the generous benefactor, helping out the poorest, while additional expenditure is deferred until the future, after which you have already won your election, or lost it and left the mess to your opponent to clear up.

    Meanwhile those whose jobs or businesses are destroyed are The Forgotten Men, for it is far harder to plot the causal link between their suffering and government spending than it is to point to a beneficiary on an extra £5 a week.

  13. Posted 10/04/2009 at 17:32 | Permalink

    well im sick of this we have worked for 33 years never been unemployed til xmas,now we are literally starving to death,we eat one meal a day,as we still have loans etc to pay and out of our 90 quid a week,we are left with less than 10 for food essentials etc,we cant get any help,we dont want to be dole bludgers,we are depressed and suicidal,so how dare you say we shouldnt get increase,its only 6 quid a week and that wont help us at all,the c.a.b cant see us for months,we cant get loans or interest stopped till then,its easy when it doesnt involve u to say these things,think of us in u.k who are hungry and scared.

  14. Posted 10/04/2009 at 17:32 | Permalink

    well im sick of this we have worked for 33 years never been unemployed til xmas,now we are literally starving to death,we eat one meal a day,as we still have loans etc to pay and out of our 90 quid a week,we are left with less than 10 for food essentials etc,we cant get any help,we dont want to be dole bludgers,we are depressed and suicidal,so how dare you say we shouldnt get increase,its only 6 quid a week and that wont help us at all,the c.a.b cant see us for months,we cant get loans or interest stopped till then,its easy when it doesnt involve u to say these things,think of us in u.k who are hungry and scared.

  15. Posted 10/04/2009 at 21:58 | Permalink

    Ann – sorry to hear about the problems you are experiencing. Though it may sound harsh, benefit increases will only lead to even more people facing the misery of life on the dole. Taxes and government borrowing will have to rise to pay for extra benefit payments. It’s also worth remembering that a series of government policies have made life more difficult for people on low incomes. Environmental regulations have increased electricity and water bills; the EU’s Common Agricultural Policy has raised food prices. On a more practical level, there are alternative debt advisory services apart from CAB in most towns – it might be worth looking them up.

  16. Posted 10/04/2009 at 21:58 | Permalink

    Ann – sorry to hear about the problems you are experiencing. Though it may sound harsh, benefit increases will only lead to even more people facing the misery of life on the dole. Taxes and government borrowing will have to rise to pay for extra benefit payments. It’s also worth remembering that a series of government policies have made life more difficult for people on low incomes. Environmental regulations have increased electricity and water bills; the EU’s Common Agricultural Policy has raised food prices. On a more practical level, there are alternative debt advisory services apart from CAB in most towns – it might be worth looking them up.

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