Benefits to be raised in real terms

In the PBR, chapter 5, we read:

Box 5.1: The effect of negative RPI inflation on the value of tax and benefits
The Government’s economic projections show RPI inflation as negative in September 2009. This means general prices using this measure of inflation are expected to fall. RPI inflation for that month is used to index income tax, tax credits and national insurance allowances, thresholds and limits for 2010-11. September measures of inflation are also used to index social security benefits.

With projected negative RPI inflation, the Government would maintain the cash value of tax allowances and thresholds, and the RPI-indexed social security benefits, consistent with statute. Holding these constant with lower prices means that in 2010-11, their real terms value would rise in relation to RPI, and that people would be better off in real terms. Analysis in real terms shows the effect on tax and benefit changes in terms of people’s purchasing power.

The basic State Pension is indexed by RPI inflation or 2.5 per cent, whichever is greater. This means that there will be an even larger real terms benefit for pensioners in 2010-11. Some benefits are uprated by earnings, and negative RPI inflation increases the real terms value of those increases. For 2011-12, when RPI inflation is projected to be positive, allowances, thresholds and benefit levels will be increased from their 2010-11 levels in line with standard indexation. This will maintain the real terms gain from 2010-11 for future years.

In other words, the government is committing that, even if deflation races away, benefits will not be cut in cash terms and the pension will always rise at at least 2.5%.  Committing to real rises in benefits whilst trying to keep overall expenditure to an ambitious 1.1% growth rate seems like a challenge.  Why should deflation change the way that benefit and pension indexation is done?  And can we really afford an open-ended commitment to raise benefits and pensions in real terms at a time when budget deficits are so out of control and debt is to rise so rapidly?