Treasury refuses to back 5.2% pensions pay-out
George Osborne will deliver his autumn statement next month. Picture: PA
THE UK government has come under fire after giving itself an “out” that could allow it to avoid paying an extra £1.8 billion in benefits and pensions triggered by the rate of inflation rocketing to a record 5.2 per cent.
Consumer groups, charities and union leaders rounded on ministers after the government refused to confirm whether benefits and state pensions would rise in line with the September inflation figure, which is the usual procedure.
Such a rise, which would kick in next April, would cost the government an extra £1.8bn, according to estimates from the Institute for Fiscal Studies (IFS).
Last month’s inflation figure equals the record from September 2008 and is the highest since the Consumer Price Index (CPI) was introduced in 1997.
In a speech to the Institute of Directors last night, Bank of England governor Sir Mervyn King claimed the cost of living had reached a peak and that inflation was likely to tail off in the coming months.
However, the higher than expected figure – driven in part by rising utility bills and spiralling petrol prices – is nevertheless bad news for consumers who are already struggling to pay bills and meet household costs.
The Prime Minister’s official spokesman hinted that the usual annual increase in benefits and pensions – traditionally based on September’s CPI rate – may not be automatic, claiming it was for the Chancellor to decide each year whether to continue to apply this procedure.
“The process on this is that the September figures are usually used for uprating benefits, but the final decision on that is something that happens in the autumn statement,” the spokesman said.
“It is standard procedure [to use the September figure], but it is also standard procedure that the decision is taken at the Pre-Budget Report, under the previous government, or in the autumn statement, under this government.”
The figure has previously only differed from the September inflation rate if the cost of living has been in negative territory and would therefore have meant a cut in benefits and pensions. George Osborne is due to deliver his autumn statement to the Commons on 29 November.
Tom Vosa, Clydesdale Bank’s chief economist, warned the previous Budget had accounted for a far lower level of inflation, and that had sparked fears the government could decide not to set the increase based on the latest figure.
“In the March Budget, the Office for Budget Responsibility had revised the deficit projection upwards due to higher inflation, but they only expected 4.3 per cent year-on-year inflation in September,” he said. “This has raised questions as to whether the uprating will actually take place at the 5.2 per cent level.”
Brendan Barber, general secretary of the TUC, attacked the government’s suggestion that below-inflation increases might be on the cards. He said: “Today’s hint that the Chancellor won’t honour the commitment to uprate pensions and benefits in line with this month’s inflation figures is very alarming.
“The cost of living has rocketed for those who depend on pensions and benefits more than any official measure captures.
“Not only does the Chancellor want to use CPI, the generally lower inflation measure that excludes important items like housing, it now seems that he may not even keep that promise.”
Consumer groups hit out at the government’s indecision, arguing that the state was already saving on benefits increases by switching the measure by which benefits are uprated to the CPI from the Retail Price Index (RPI) – a change that took place last month.
While the CPI increased from 4.5 to 5.2 per cent, the RPI figure, which includes housing costs such as mortgage payments and council tax, rose from 5.2 to 5.6 per cent – the highest annual rate since June 1991.
“People who rely on benefits are already living from hand to mouth, and finding it hard to pay the basic household bills,” said Susan McPhee, head of policy at Citizens Advice Scotland. “They need to know today that they will continue to get the support they need and won’t be left even worse off.
“We urge the government to make absolutely clear today that benefits will be uprated as expected. That’s the very least they can do to support the many people who are really struggling.”
Dr Ros Altmann, director-general of Saga, which represents older people, said a failure to increase state pensions in line with September’s inflation rate would be a “second blow” for pensioners, who already have a higher rate of inflation than other age groups due to their reliance on energy to heat their homes.
Saga calculated that annual CPI for those aged 65 to 74 is running at 5.4 per cent.
“It’s bad enough that the pensioners in this country are having to endure these high rates. If the government tries to pick and choose like this, it’s not going to stop pensions suffering from high inflation,” she said. “It will not be made up for when the state pension is uprated. The government has already chosen to use CPI, rather than RPI, which is [usually] lower. Is it now intending to impose a second blow on the inflation protection for pensions?”
Linsey Thomson, senior economic analyst at the Alliance Trust Research Centre, which calculated the headline rate of inflation for over-65s as 6.1 per cent, said: “As expected, we are really now starting to see the impact of higher gas and electricity prices kick in, as inflation rates facing the elderly households reach their highest levels seen since the end of 2008.”
Wages have generally not risen in line with inflation, working out at an average increase of just 1.8 per cent a year, leaving workers out of pocket.
Gas and electricity prices rose by 13 per cent and 7.5 per cent respectively over a single month, while the rate of the increase in the cost of clothing and footwear dropped back slightly last month, but still rose by 4.4 per cent.
Joanna Elson, chief executive of the Money Advice Trust, said: “Today’s inflation figures form yet another part of an increasingly gloomy financial picture for struggling households across the UK.
“Whilst the cost of paying bills and buying groceries continues to rise sharply, for many, the money households are bringing in cannot match the price rises.”
Kevin Mountford, Moneysupermarket.com’s head of banking, said: “The rising cost of living is something UK adults have had to bear the brunt of over the last 12 months, with rising energy, fuel and food costs putting significant pressure on the nation’s wallets.”
Savers have also been hard hit. Estimates from website Moneyfacts show that, to beat inflation, a basic-rate taxpayer now needs to find a savings account paying 6.5 per cent in interest, while a higher-rate taxpayer at 40 per cent needs to find an account paying at least 8.67 per cent.
Economists said the rising cost of fuel and utility bills, combined with the 20 per cent VAT rate, had put pressure on inflation and warned it could hamper economic growth if consumers did not have money to spend.
“Temporary factors, such as high global commodity prices and VAT rises, have come together to raise inflation above the 5 per cent mark,” said Shehan Mohamed, economist at the Centre for Economics and Business Research. “This has led to a large squeeze on households’ disposable incomes, which will impact spending on the high street.”
Graeme Leach, chief economist at the Institute of Directors, pointed to the situation three years ago, when inflation fell from 5 per cent to 1 per cent in only 12 months. He said: “The first response to the latest inflation figures is ‘ouch’. The second response is more considered. The MPC [Bank of England monetary policy committee] always knew that inflation would head north of 5 per cent this year, but their main concern was the inflation outlook over the next two years.”
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Comments
There are 41 comments to this article
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jock in the box
Wednesday, October 19, 2011 at 10:13 PM40 You claim "If Europe had it's way we'd be paying 20% VAT on our household fuel.". Based upon what exactly?
Tintock Pete
Wednesday, October 19, 2011 at 07:34 PM#37 - People can pollax that effect by quitting booze and fags!.... Yes the government is already taking a hit on the fags that's why they went up so much. Petrol and VED is another area they're taking a hit but as all us non smokers realise, if everyone stopped, our income tax and NI. would just go up to compensate. If Europe had it's way we'd be paying 20% VAT on our household fuel.
gingernut
Wednesday, October 19, 2011 at 06:48 PMit looks like we have the devil and his disciples in charge ,whatever did the long suffering british people do to deserve this pile of plonkers!!!!? the country is deteriorating at an an alarming speed , cameron and his mob are plumbing us to new depths this despicable pile are an affront to every man woman and child in this country who would ever have thought that we would be brought to our knees in such a shameful fashion ?poor old britain is on its way down the sewer!!!!
Bamboozler
Wednesday, October 19, 2011 at 03:25 PM#37 - People can pollax that effect by quitting booze and fags!
Tintock Pete
Wednesday, October 19, 2011 at 02:57 PMJock, I will agree one thing with you and that's the fact that the government will probably claw back any benefit rises with increases to taxes on everyday necessities and booze and fags.
jock in the box
Wednesday, October 19, 2011 at 02:24 PM28 I follow what you are saying ,but government has no incentive to lower fuel prices ,on the contrary they charge VAT and rake in more dosh when fuel companies raise charges way in excess of that required. Shareholders are receiving substantial returns on their fuel sector investments. The rest of you are paying for it. If the Tories do enter into any price regulation it will NOT involve a reduction in price unless soon after accompanied by an increase in VAT so the government still gets its slice of the action, and you still pay more or less the same. It needs major defeats for the Tories and LiDs before they will listen. Labour are no better and they presided over increases in fuel prices, to try and help disguise just how incompetent Gormless Broon really was. The problem is LONDON government, which one is irrelevant.
jock in the box
Wednesday, October 19, 2011 at 02:07 PM33 I have been active in Nalgo and Unison for many years and have seen the damage personally,which successive governments have inflicted upon people over many years both from local government health and fuel employment. There definitely is poverty in the United Kingdom, and we dont need any half wit schemes to confirm what we already know. The government KNOWS what benefits it pays out, and if it does not know whether the payments are adequate or not THEN THEY SHOULD NOT BE IN GOVERNMENT.
jock in the box
Wednesday, October 19, 2011 at 01:59 PM27 Quantative easing is just another name for printing money. If you get it wrong (the quantity over a time period is crucial )one of the effects can be inflation. If benefits and pensions fail to keep pace with inflation it means you are earning less than previously , since your currency buys less and whilst this is seen as desireable by the brain dead ferengi, it does nothing to expand an economy, and that is what the UK must do. THose who have said We should not be surprised by this are correct. Its what the Tories do best. They firmrly believe that wealth is a virtue and it should be financially rewarded . They have more money than sense, and that statement would still be true if they were penniless!
Tintock Pete
Wednesday, October 19, 2011 at 01:57 PM#31 Jock, I don't know if you saw the story in another newspaper about census takers getting info from supermarket's loyalty cards. The DWP could do this with sky et al cross reference this with store purchases and consider whether benefit claimants actually need a rise.
jock in the box
Wednesday, October 19, 2011 at 01:51 PM29 People who receive a pension from their employer contributed into that pension from their earnings as well as paying into the state pension provision. If we did as you suggest (which is not possible since it is legally theirs),they would be contributing toward YOUR PENSION! Why should they contribute to yours but not their own?
jock in the box
Wednesday, October 19, 2011 at 01:47 PM30 If we measured poverty by whether we have a sky dish or not, we should rightly be detained under the mental health act . Benefits are only paid where thorough investigation has preceded their payment, or at least should have done. The payments made are hardly above the most basic level .What age are you? There are numerous documented cases of pensioners dying because of hypothermia over many years. YOU ARE AN IDIOT !
Tintock Pete
Wednesday, October 19, 2011 at 12:59 PMNobody on benefits is "poor" not even pensioners.The sky dish on the wall gives it away.
Alan Craigie
Wednesday, October 19, 2011 at 12:45 PMSince we're still borrowing 15 billion a month it's crucial that public expenditures not increase. Public sector pensions need to be cuback as well. And people in receipt of a public sector pension should be ineligible for state pensions.
Bamboozler
Wednesday, October 19, 2011 at 12:11 PMThe Tories have historically given bigger pension increases year on year, than Labour. That is fact, look it up!. Perhaps the reason is two fold. 1 - The inflation figures came out before the increase was calculated based on what we can afford and 2, as most of the increase is largely based on energy prices, the winter fuel payout should offset most of that increase and the remainder is the exsiting pension increase. There are several ways round this, 1. The calculation for the Winter fuel payout should compensate for the shortfall(yet to be announced) and 2. Additional government pressure on energy companies will hopefully be successful. Though, because these companies are not 100% government owned, they might wriggle out of any demand to drop the cost of Gas and Electricity.
Dragonlord
Wednesday, October 19, 2011 at 10:58 AMWhy is everyone surprised at this? The Torags have never done anything to help the poor and disadvantaged. They will try to get as many as possible off benefit ( even if it kills them) and will reduce help for the old with every step they take towards a two tier society.
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