Benefits claimants could see a real term cut in what they receive if the Government decides to raise payments in line with wages, rather than the higher rate of inflation. It is one way of saving money that ministers are considering as they look for ways to cut public spending amid Britain's economic woes.
In May 2022, former Chancellor Rishi Sunak promised to uprate benefits next year in line with the Consumer Price Index measure of inflation in September, Birmingham Live reports. That figure was 10.1 per cent, it was revealed last week.
However, since then the economic outlook has become much worse as the Government's mini-budget in September sent markets into turmoil, worsening an already difficult situation caused by a struggling global economy. It means the new Chancellor Jeremy Hunt has warned that "difficult decisions" will have to be made before he unveils his Medium Term Fiscal Plan on October 31, which will set out his plans to reduce the national debt.
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As part of that statement, the Government is reportedly considering raising some working-age benefits by the growth rate of average earnings, which is at 5.5 per cent - far lower than the CPI at 10.1 per cent. Independent think tank the Resolution Foundation says this would permanently cut the real value of benefits by slightly more than four per cent, as even if the money claimants receive goes up, if prices are rising faster, the real value of their money will be less.
In a new report, the think tank said that if the cuts affect working age benefits - not including protected benefits (which must be raised by CPI by law) - they would affect nine million households (seven million of which have someone in work), containing 30 million people. These households include the majority of those with working-age people and children or people with disabilities.
It said losses in income would range from around £50 a year for one-child families who only receive Child Benefit, to £1,000 or more for some parents who get Universal Credit. It said that Universal Credit claimants who are in work would lose more in cash terms as the benefit's work allowances would (presumably) be cut.
The report said: "Coming on top of substantial cuts in the 2010s, a new cut next year would leave the real value of basic out-of-work support 16 per cent lower in 2023-24 than in 2010-11 (and slightly lower than 40 years earlier in 1983-84). And 2023 is a uniquely bad time to be cutting incomes.
"On our latest projections, even if all benefits are uprated in line with inflation, the real disposable incomes of the poorest may fall by 11 per cent next year, the biggest drop on record and wiping out all income growth accrued over the past twenty years. If some were indexed only to earnings, the drop in income would be 14 per cent.
"The number of people living in absolute poverty is now projected to rise by 2.9 million between 2021-22 and 2023-24 and a real benefit cut would add another 600,000 people to this rise, including 300,000 children."
Which benefits may face a real terms cut?
The following 10 benefits could rise in line with earnings rather than inflation:
- Universal Credit
- Child Benefit
- Contributory Employment and Support Allowance
- Contributory Jobseeker's Allowance
- Statutory Maternity/Paternity Pay and Maternity Allowance
- Income-based Jobseeker's Allowance (JSA)
- Income-related Employment and Support Allowance (ESA)
- Income Support
- Working Tax Credit
- Child Tax Credit
These benefits are still likely to see some kind of rise in April, but it could be by the 5.5 per cent average earnings figure rather than by inflation
Which benefits won't be cut?
The DWP is required by law to increase the following benefits by at least the rate of inflation:
- Personal Independence Payment
- Disability Living Allowance
- Attendance Allowance
- Incapacity Benefit
- Severe Disablement Allowance
- Industrial Injuries Benefit
- Carer's Allowance
- Additional State Pension
- Guardian's Allowance
- Attendance Allowance
What about the State Pension?
The Government has promised to honour the triple lock system for pensions, after it was set aside for 2021. The triple lock means that the State Pension goes up in line with whatever is highest out of inflation, earnings or 2.5 per cent.
The Resolution foundation said it believes the State Pension "will almost certainly be increase in line with inflation in April". However the support for low-income pensioners, known as Pension Credit, may not rise by the same amount.
It is thought that Pension Credit may be one of the benefits to rise by 5.5 per cent instead of 10.1 per cent. Although in previous years the Guarantee Credit element of Pension Credit has had an above-earnings increase, so it's unclear what might happen this year.
How would benefit payments be affected?
The Resolution Foundation said that if benefits go up by earnings rather than inflation, this would amount to a 4.2 per cent real terms cut in 2023-24. It said that benefits would then remain permanently lower in future years.
It said that Child Benefit claimants would lose out of £52 a year for the first child and £34 for any subsequent children. The basic rate of Universal Credit for someone who is unemployed and under 25 would be £185 a year lower than with a CPI linked increase, and a single disabled person on UC could lose £380.
The report added: "We assume that UC’s work allowances would also be under-indexed (increased by less than inflation) and therefore people in work would lose even more: a single parent in work with one child would lose £478, while a working couple with three children could lose £978 a year."
Income losses in 2023-24 if benefits are uprated by earnings rather than inflation:
- Family with one child only receiving Child Benefit - income drop of £52
- Family with two children only receiving Child Benefit - income drop of £86
- Single unemployed adult on Universal Credit - income drop of £185
- Single disabled adult on ESA - income drop of £324
- Single disabled adult on Universal Credit - income drop of £380
- Working single parent (with one child) on Universal Credit - income drop of £478
- Working couple renting (with two children on Universal Credit - income drop of £752
- Working couple not renting (with three children) on Universal Credit - income drop of £978
The Resolution Foundation concluded: "Overall, nine million households (45 per cent of working-age households) would face an income loss, containing 30 million people. Of those, seven million households contain someone in work.
"Even among recipients of Universal Credit, many are in work: in September 2022, 2.2 million are in work, 1.4 million are unemployed, and 2.2 million are not required to search for work. Furthermore, a significant number of households would lose a particularly significant amount of money, with three million households (15 per cent of the working-age total) facing an annual loss of over £500.
"Families with children are most likely be affected by these changes (due to the high proportion of families that receive Child Benefit), with 74 per cent of couples with children and 95 per cent of single parents facing income losses. Although social renters are the housing group most likely to be affected by these changes (with 79 per cent at risk), it is still the case that 38 per cent of households with mortgages are set to see income falls if benefit uprating is reduced – adding to their challenge of rapidly climbing interest rates.
"And, even though we have assumed that most disability benefits would be inflation-uprated, 63 per cent of households containing someone with a disability are set to face falling incomes. Half of working-age households in the North East, North West, Yorkshire and West Midlands would lose out."
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