UK: Switch from RPI to CPI for calculating inflation

Proposal

Early into its period in office, in June 2010, the Coalition Government announced in its Emergency Budget its decision to switch from RPI to CPI as a means of calculating inflation – which was subsequently to be used to calculate spending on inflation-linked benefits, state pensions and public pensions. As Timmins (2015: 328) notes, this was ‘by far the biggest cut [of the 2010 Emergency Budget], though almost a silent one in terms of its public impact’ – a silence that was no doubt due to the level of complexity involved and the stealthy way in which it systematically skimmed money off benefits over a number of years without the need for public announcements or policy decisions. By the end of the Coalition’s period in office, the IFS estimated that the CPI-indexation resulted in a £4.26bn reduction in public spending for 2015/16, which was one-quarter of the entire net savings produced as a result of the Coalition’s benefit reforms (table 2.1). It also had a significant impact in terms of reducing pension fund liabilities (including private sector ones).

Given the scale of the impact of this measure, we consider the severity to be high, and as it was subsequently used as a guide to index a range of types of spending, including benefits and pensions, we consider its target to be universal.

Severityhigh

Target: universal

Refusal

As noted, the fact that this was a relatively technical change resulted in few direct challenges or opposition to the move. Indeed, it was felt by many that the technical nature of the changes was such that they weren’t perceived (at least not directly) by the benefits/pensions recipients. The technical nature of the change, moreover, was such that any opposition which did occur tended to come from similarly technical quarters – for instance, the Royal Statistical Society wrote to the  independent UK Statistics Authority in 2010 warning that the CPI “is not necessarily the best index for all purposes”, and calling for more prominence to be given to alternative inflation measures. Through the course of the coalition government, however, opposition began to grow as trade unions and pensions groups began to more fully appreciate the impact of the move.

Imperceptible dissent – as noted in our discussion of public sector pay, the public sector faced growing recruitment problems since 2010 as pay differentials with the private sector worsened. The move to switch the calculation of inflation further consolidated this worsening of the financial reward for public sector employment, and therefore is likely to have further contributed to these recruitment problems.

As with public sector pay, therefore, we consider this form of resistance to be:

imperceptible dissent (manifested in recruitment problemes): moderate

Public opposition . Criticism of the switch to CPI was particularly prevalent amongst public sector trade unions and other associations representing public sector employees. As shown below, trade unions sought to put together a range of different forms of opposition – in addition they spent considerable time publicly criticising the move. In this they were also joined by other groups keen to highlight the unfair nature of the moves – e.g. the Forces Pension Society (described as “the closest thing the armed forces has to a trade union”) criticised the move, with its General Secretary saying, “Our beef with CPI is the amount it will devalue pensions, especially of those who have to take a pension early by being invalided out. Similarly, the Civil Servants Pensioners’ Alliance highlighted the way in which this contradicted pre-election pledges by the Government, stating,

“We have been cheated by the politicians who said they would not bring in retrospective cuts. We have letters from Pensions Minister Steve Webb and Transport Secretary Philip Hammond saying the current indexation measures will be honoured. Our members voted on the understanding that the Conservatives or the Lib Dems would not put their pensions in jeopardy. But now we see a cut that is on a par with the removal of the state pension link with earnings in 1980.”

Other sources of public opposition and criticism came from pensioners’ organisations. For instance, Roger Turner, chief executive of the National Federation of Occupational Pensioners, said, ‘For many of my members, they worked for 40 years and contributed to their pensions on the expectation of RPI… and suddenly it’s taken away from them,’ and went on to blame the bankers – ‘I don’t think pensioners should be picking up the bill for the excesses of the bankers, who still seem to be getting away with it.’

In 2012 an e-petition was launched by PCS member, Jim Singer, calling on parliament to discuss the switch, highlighting that it would ‘mean a steady reduction in spending power for pensioners as they progress into their retirement’ and arguing that ‘the RPI measure should be reintroduced without delay to ensure that the spending power of these Public and Private pensioners is maintained’. The epetition rapidly reached the 100,000 votes needed in order to force a request for a parliamentary debate.

In addition to public criticism, the government faced a legal challenge by public sector trade unions – including Unison, Unite, the Fire Brigades Union, teachers’ union NASUWT, the National Union of Teachers, the National Association of Retired Police Officers and the Civil Service Pensioners’ Alliance – who sought to challenge the revised CPI-linked method for calculating pension increases. However, in 2012 they lost their High Court challenge of government policy, and in 2013 they also lost their High Court appeal.

public opposition (non-disruptive): substantial

public opposition (disruptive)

Despite the lack of direct opposition to the switch to CPI, it was however the case that opposition took place in the form of the public sector pay dispute of 2011 – with the switch from CPI to RPI regularly noted by public sector unions as part of the reason for considering, balloting for, or undertaking strike action – for instance, by the NUT, FBU, the Chartered Society of Physiotherapy,  and the FDA. Further, in welcoming the strike action scheduled to take place in November 2011, and which included several unions striking at the same time – including Unison, UCU, Unite, RMT, PCS, and the teaching unions (it was estimated that up to 2 million people took part in the strike) – the TUC made a direct reference to the RPI/CPI switch, highlighting objections (in the negotiations prior to the strike action) to the “proposed contribution increases, increases in the pension age, and the impact of the indexation change from RPI to CPI on which the government’s position remains unchanged” (emphasis added). Similarly, in announcing strike action the TUC stated that, “without any negotiation, the government decided to change the indexation method for pensions – from the RPI to the CPI inflation measure, wiping 15 per cent off the value of public sector pensions at a stroke”. Whilst one of the main forms of opposition to the RPI/CPI switch took place as part of a broader mobilisation against (in part) the way in which the recalculation had an impact upon the generosity of public sector pensions, there was nevertheless  a clear recognition that the Government’s move to a new way of calculating inflation was part of the reason that strike activity was taking place.

We consider this strike action to be a disruptive nature form of public opposition – in that it represented an attempt to use the power to take strike action to promote criticism of government policy. Given that the aim could not really have been to impose a major and direct impediment to the operation of the government (which might have been considered a form of militant refusal) as the strike actions were always of a single or two day strike type of event. In terms of scale, the sporadic and often only tokenistic nature of the strike meant that we categorise the strike actions as moderate in terms of scale.

public opposition (disruptive): moderate

Obstacles

In terms of obstacles, it wasn’t entirely clear that the instances of opposition and refusal that occurred in response to the RPI/CPI switch were especially effective in terms of having an impact upon the Government. The legal challenge was unsuccessful, and the strike activity which took place was largely tokenistic in that actual strike days tended to last for only one or two days at most, and were therefore largely undisruptive and without significant impact.

Perhaps the most obvious way in which acts of refusal to the RPI/CPI switch created obstacles for the Coalition Government, therefore, was in terms of the underlying sense that much of the population had, that the Government was overseeing a process whereby both benefits and financial remuneration for public sector employment were both being curtailed. As noted with regard to public sector pay, this created problems in terms of recruitment and retention of public sector employees; similarly, with regard to benefits cuts, a sense that the Government was acting unfairly was prevalent, despite the fact that benefits cuts were also accepted as necessary.

As with public sector pay, the main obstacles created for the government were related to recruitment problems in a context of declining relative pay levels for the public sector – i.e. a problem in terms of government institutional capacity. However, the decision not to participate as a particular employee does not necessarily constitute a strong form of resistance, and we therefore consider this to be a moderate form of non-compliance. It also brings with it, however, indirect problems in that it is associated with a reduction in the degree of institutional capacity available to the government and thereby prevents the achievement of policy objectives (governing problems, minor).

obstacles: non-compliance, indirect damage to institutional capacity

Response

The Government was largely instransigent in the face of opposition.

Discipline – As seen above, it fought the legal challenge raised by the trade unions (and won)

consent-seeking – in response to public criticism the Government sought to argue that this was merely a technical change – i.e. the best way in which to measure inflation (and not an attempt to reduce costs). For instance, Pensions Minister, Steve Webb said: “Prior to the election I assured civil service pensioners that inflation protection for their pensions would not be removed. In the emergency Budget, the coalition Government committed to increasing civil service pensions every year in line with the increase in consumer prices – maintaining the link between pensions and inflation.” The Telegraph goes on to report that “the Department for Work and Pensions (DWP) says CPI is a more suitable measure as it more closely reflects pensioners’ costs and is less volatile than RPI”. Indeed, Steve Webb is quoted as saying,

‘CPI was positive, long term it tends to be lower than RPI, there’s no point me pretending it’s not the case, it is the case,’ – ‘But what you want is not a high number or a low number, but the right number, a fair number that reflects the inflation experience of the people you are indexing for.’

In response to the epetition, Parliament granted a half-day debate on the topic in 2012 – and the debate can be viewed here:

http://videoplayback.parliamentlive.tv/Player/Index/83dd0ac7-1f73-49a5-9fcb-3f1fc15a93da

In this debate, the Government also relied on technical details in their response, for instance Steve Webb (Pensions Minister) responded to criticism by stating that,

“One of the big differences between CPI and RPI in regard to the basket of goods is that the CPI does not include mortgage interest. It is worth pointing out that only 8% of pensioners have a mortgage. Why would we insist on using a basket that gives huge weight to mortgages for a population that hardly ever has a mortgage?”

Steve Webb also points to the fact that the method of calculating CPI takes into account more clearly the way in which prices impact upon consumers (as a result of what it known as the ‘formula effect’), stating that,

“It has been suggested during the debate that pensioners do not shop around, but my experience tells me that they do. In the shops, for example, they will choose between a branded product and an own-brand product. I think that most pensioners are pretty canny. They are the most likely to shop around, and that is the way in which the CPI is constructed.”

In other points in the debate, Webb argues that ‘CPI is a better measure’, and that it was ‘the most appropriate index’.

concessions: none

Outcome

Went ahead?

Yes

Consequences?

Very little. Much of the opposition to the switch from RPI to CPI was ineffectual – the policy change itself was of a technical nature and as a result it was not always clear the extent to which it had been perceived as an austerity measure. Opposition that did occur largely focused on the impact on pensions – but the public criticism, legal challenges and strike action all failed to have a serious impact upon the Government. Perhaps the biggest impact on the Government was the way in which a general sense lingered that the Government was attacking certain key groups – especially benefit recipients and public sector workers – however in both cases it was not clear that the Government was badly affected by this perception; indeed it is arguable that they actively sought to cultivate this reputation. Nevertheless, recruitment problems were experienced.

consequences: limited

sum: obstacles (moderate), consequences (limited), concessions (none) – patchy (in that it prompted recruitment problems) and slightly problematic, but full adoption (1+0.5=1.5)

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