It's the Stupid Economy

The Tories are in crisis. They are losing supporters - and now MPs - to UKIP. There's no chance that UKIP will form a government but it may gain a couple of seats and, in several places, split the right-wing vote and let Labour or the Lib Dems in. They've also just suffered a slightly embarrassing sex scandal and all of this threatens to overshadow their annual conference, about which, only a couple of days ago, they were feeling quite chipper, owing to what the press seem to have decided was a not-very-good Labour conference. This is the context in which George Osborne stood up today and announced a two-year freeze on benefits.

He's doing this because he's discovered that over the last couple of years, benefits have risen faster than wages and, he has concluded, 'the fairest way to reduce welfare bills is to make sure that benefits are not rising faster than the wages of the taxpayers who are paying for them'.

First, what this actually means is unmistakably hitting the poorest people in our society. Jobseekers Allowance starts at £57.35 per week and can be as much as £72.40 per week. Do I need to say that this is not very much money? And a benefits freeze is a real-terms cut, of course; not a huge cut, because inflation is pretty low at 1.5%, so over two years it'll feel like around a £2.50 cut in spending terms. Child benefit is also frozen and that's a universal benefit, so it doesn't just go to the poor, but freezing it will mean very little to a middle class family, but much more to a very poor family. The cuts will hit 5m families defined as the 'working poor'.

But second, look at the extraordinary admission here. In Osborne's first budget in 2010, he changed the way benefit increases were calculated. They were pegged to the Retail Price Index, but Osborne changed the system so that they would be pegged to the Consumer Price Index. The big difference between these two measures is that the RPI includes house prices and CPI does not; and, mostly, this means that the RPI registers higher price rises than the CPI. So benefit rises have already been lowered.

The extraordinary admission - as far as I can see, not commented on by any of the journalists reporting his speech - is that if benefit rises are outstripping wage rises, then wage rises have been, for the last few years, consistently lower than the rise in prices. In other words, Osborne is faced with the fact that benefits are going up in line with prices, while wages are lagging behind prices, and he thinks the scandal there is the rise in benefits. It's like someone seeing two hospitals, one with a death rate much higher than the second, and wondering what's gone wrong with the second hospital.

This is all politics, of course. Osborne has tapped into a deeply unpleasant instinct among the core Conservative vote that imagines the unemployed living a life of unparalleled luxury at the taxpayers' expense. Talk of benefit caps and cuts plays well with this group, which is why he does it. It's completely untrue but it seems to be working. As zero hedge.com have noted, opinion polls suggest that the public on average believes that 41% of social security goes to the unemployed; the actual figure is 3%. We apparently believe that the Government spends 29% more on Jobseekers Allowance than on pensions; in fact it spends 1500% more on pensions than on benefits. (The flagship tax break that Osborne announced was to reduce the tax paid on inheriting a pension untouched from the age of 65 to 75. Note that this is not reducing tax on pensions; it's actually another tax reduction on inherited wealth.)

It's all part of the greatest confidence trick that this Coalition have perpetrated, which is to ram home the widespread belief that Labour left the economy in a mess because of their high public spending. Insofar as the money used to bail out the banking sector in 2008 was public spending it's true, but it's nothing to do with welfare payments which were actually very low under Labour in the 2000s (mainly because unemployment was so low). Welfare payments are much higher now because this is the slowest recovery in living memory and unemployment levels are higher than at any time from 2000 to 2009.

And the Tories have never satisfactorily explained what they would have done differently throughout the 2000s to ensure that the banks would not creep to the edge of systemic collapse. Indeed, when the run on Northern Rock happened, when the contagion was spreading through the system, the Tories were completely paralysed. They literally had no idea what to do. And when Gordon Brown kicked into action and spearheaded a rescue mission that Europe and the US followed, they simply supported him. 

But it's inconvenient for the Tories to remember this. Much easier to pretend that Labour spent billions and billions of money on the grasping, the lazy, the workshy. Much easier to pass off their hardline, extremist allegiance to cutting public spending and their decision - decision, not obligation - to rule out tax rises or investment in jobs as some kind of iron economic law. Horribly, Osborne can dismiss the suffering he wants to inflict on the poor as being tough with the economy and this will play well with that tiny sliver of ignorant misanthropic floating voters who might otherwise go to UKIP to fuel their hatred of their fellow citizens. Because to actually face the real scandal at the moment, that the Tories have looked after business but not the people business employs, would unravel the whole stupid economic story that George Osborne is peddling to his Nasty Party.