The cost of inflation

lemonjelly

Just wondering if high inflation could impact on austerity.

Septembers inflation was very high. This is the figure which will be used to uprate benefit levels and retirement pension next april. I think it is also the figure used to calculate the increase in the ISA allowance too.

So, as a result of the inflation figures, the benefit bill paid by the government is likely to increase by 5%ish, assuming things stay as they are, potentially worsen if unemployment increases, or the balance of the population shifts to more pensioners etc. In addition, if more people are putting more savings into ISA's, tax revenue falls.

With the 5%ish increase in benefits, it is possible that more people will fall into the category of entitlement.

I suspect that the ISA thing is relatively minimal in impact, but there will be a big increase in the benefits bill. So how will this affect affordability? How will the government pay this bill?

JayScottGreenspan

Well tax receipts won't go up by nearly as much - wages are only rising at 1.6%. The deficit just got worse.

vivatifosi

I saw a commentator on the news talking about this very point yesterday. Can't remember his name (didn't realise we'd be discussing it here today). In a nutshell, he said that Osborne will be secretly happy that the inflation rate is 5% because it will help them inflate away debt. He also said that increases were being looked at and that they may change the way it is calculated, by perhaps looking at it quarterly and smoothing. There is acknowledgement, apparently, that the VAT increase will fall out in January and this will lead to quite a substantial reduction. Where that leaves things, goodness only knows, but thought I'd chuck it in there for discussion.

Graham_Devon

For info, it's costing an extra £1.8bn. They calculated the budgets on CPI being 4.3%. So this £1.8bn is new spending they will have to find. On top of the £1bn they had to find the other day for the pensions issue.

All just being added to the debt pile, I'd guess?

ILW

I have my doubts about inflation dropping back next year. This is based purely on the fact that Mervyn King said it will and he has been completely wrong for the last few years.

Really2

It's an interesting set off.

The other option would be to raise rates slightly, but that could mean lower GDP, lower tax receipts and further financial sector support.

I think overall, people would rather have a slight increase in debt supporting the old etc, rather than increasing the debt by falling tax income and bank bailouts.

Lets face it, overall although big numbers compared to the deficit and the amount we could lose by falling incomes or increased debt costs it is perhaps not that big.

Really2

JayScottGreenspan wrote: »

Well tax receipts won't go up by nearly as much - wages are only rising at 1.6%. The deficit just got worse.

Would we not have to know what the total revenue of wages are, there are over 20M workers. So wages in theory do not have to mirror this to offset it.

But there is no doubt the deficit would look better if wages were matching inflation. But if they were I dare say the economy would look better also, so we would have the tools available to curb inflation a bit.

daveyjp

If you are in a low paid job with no prospect of a significant wage increase it can be a very easy decision to leave when benefits are increasing by 5.2%.

This question was posed on Newsnight last night, but avoided completely by whoever was Govt spokesperson.

Really2

daveyjp wrote: »

If you are in a low paid job with no prospect of a significant wage increase it can be a very easy decision to leave when benefits are increasing by 5.2%.

This question was posed on Newsnight last night, but avoided completely by whoever was Govt spokesperson.

I think leaving means you get nothing for 6 months. (could try to get the sack though)
If people would rather do nothing to get money rather than earn it I would say they are most likely already on benefits.
I don't think this will have swayed their work ethic, we are talking a few £ a week.

wotsthat

daveyjp wrote: »

If you are in a low paid job with no prospect of a significant wage increase it can be a very easy decision to leave when benefits are increasing by 5.2%.

If someone in work is doing the calculations to work this out I'd guess that they were intelligent enough to work out that if they packed up work they'd forfeit any future wage increases, potential bonuses, promotions etc.

I'm sure that there are plenty of examples of it not being financially worthwhile working but I also think it's used a handy catchphrase by many more who simply can't be bothered to work.

ILW

All unemployment benefits should be calculated so the recipient is worse off than someone on minimum wage. Only then will the system be considered fair and just.