Low-income families with children will lose out the most if the Government uprates certain benefits by earnings growth, not inflation, analysis suggests.
Nine million UK households containing 30 million people will be affected if benefits rise in line with earnings, which the Government has been considering, the Resolution Foundation said.
Of those, seven million households contain someone in work.
It said an uprating by earnings – amounting to a real-terms cut – would set the typical incomes of the poorest fifth of households back to levels not seen since 2000-01.
With benefits having repeatedly failed to keep pace with inflation over the past decade, this would see real income levels for Britain’s poorest families fall to levels not seen since the turn of the century— Adam Corlett, Resolution Foundation
This would represent an “unprecedented period of living standards stagnation” for millions of the poorest families, it said.
How much to raise benefits by is the latest issue that is splitting the Tory party, with the Government refusing to rule out giving benefits claimants a real-terms cut to their incomes.
Chancellor Kwasi Kwarteng will announce the Government’s decision during his medium-term fiscal plan on October 31.
Decisions on benefits uprating would usually be announced in November, and are based on the Consumer Prices Index (CPI) rate in September, with any change to come into effect the following April.
The Resolution Foundation analysis, The Long Squeeze, estimates uprating benefits in line with the recent earnings growth – 5.5% – would save the Treasury £3 billion by 2026-27.
September’s CPI rate is expected to be around 10%, it said.
Certain benefits must be increased in line with rising prices, including Personal Independence Payment, Attendance Allowance, Disability Living Allowance, Carer’s Allowance, Incapacity Benefit and others.
The Government may also increase other benefits if deemed appropriate, “having regard to the national economic situation and any other matters” considered relevant.
Benefits that fall into this category include Universal Credit, Child Benefit, Jobseeker’s Allowance, Employment and Support Allowance and Income Support.
Working parents who receive Universal Credit and Child Benefit would be hit the hardest and be set to lose almost £1,000 a year, the Resolution Foundation said.
A working single parent with one child would lose £478, and a working couple with three children would lose £978.
A couple with one child only receiving Child Benefit would lose £52 a year, while a single disabled adult on Universal Credit would lose £380.
Overall, some three million households are set to lose more than £500, it said.
The think tank projects that incomes for the poorest households will see a further significant fall next year – with prices expected to continue rising and temporary Government grants to help with energy and the cost of living set to end.
It says the income of a typical person in the poorest fifth of the population was already set to fall by 11% in 2023-24 – the biggest drop since records began in 1962.
Anything short of raising all benefits in line with inflation will blight millions more childhoods and weaken our future economy— Imran Hussain, Action for Children
This is based on uprating benefits by inflation, and is predicted to deepen to 14% if benefits are only uprated by earnings.
It said the number of people in absolute poverty is projected to rise by by 2.9 million between 2021-22 and 2023-24, with a real-terms benefits cut adding 600,000 people to this.
And, partly due to increasing mortgage costs, a third of children could be in absolute poverty by 2026-27 even without any benefits cuts, it said.
Adam Corlett, principal economist at the Resolution Foundation, said: “These cuts would come at a time when families are already set to struggle with rising prices, soaring mortgages, and the end of temporary support schemes.
“With benefits having repeatedly failed to keep pace with inflation over the past decade, this would see real income levels for Britain’s poorest families fall to levels not seen since the turn of the century.”
Imran Hussain, director of policy and campaigns at Action for Children, said: “Anything short of raising all benefits in line with inflation will blight millions more childhoods and weaken our future economy.
“In April when inflation was 9%, the Government raised benefits by only 3% but promised they would ‘catch up’ next year.
“To renege on that promise now as prices continue to soar and struggling families head into winter is shameful.”
