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Millions of UK families could face cuts to the value of their benefits next year as ministers seek to make space for a fiscal giveaway in the run-up to the next election.
Working-age benefits are usually increased in line with rising living costs in April each year, using September’s official figure for inflation — reported on Wednesday to be 6.7 per cent.
Jeremy Hunt, chancellor, said last week that he faced “difficult decisions” in his Autumn Statement next month because of the spiralling cost of servicing government debt and fragile public finances.
One government insider said it was “genuinely open” whether Hunt and Mel Stride, work and pensions secretary, would conclude that a 6.7 per cent rise in benefits was affordable.
Hunt is also under pressure from Tory MPs to find space for tax cuts in his final pre-election Budget next spring, but squeezing benefits in real terms would hit working families.
Downing Street said that ministers would consider all the relevant data but refused to commit to a 6.7 per cent uplift. “I’m not getting ahead of the process,” said a spokesman for Prime Minister Rishi Sunak.
A freeze, the most extreme option, could save the Treasury more than £4bn in the first year alone, but even an increase below the rate of inflation would come at a steep cost for many low-income households.
“Should the government choose not to [match inflation], as it has done seven times since 2010, in order to save money, 9mn families across Britain will pay a heavy price,” said James Smith, research director at the Resolution Foundation think-tank.
The foundation calculates that the hit to these families, if working-age benefits such as universal credit were frozen, would average £460 a year. A low-income working family with two children would lose about £1,200.
More than 70 per cent of couples with children would be affected, as would more than 90 per cent of single parents and a third of households with all adults in work.
One option would be to increase benefits using the inflation reading from a later month, when it is likely to be lower. Inflation is set to fall sharply from October, when last year’s sharp rise in energy bills falls out of the year-on-year comparison, and to average 4.3 per cent in the first quarter of 2024, according to the Bank of England’s latest forecasts.
Benefits will not recover the real-terms value they have lost over the course of the cost-of-living crunch if ministers take this option, the Resolution Foundation said.
The value of working-age benefits has already been eroded significantly over time, largely due to the four-year freeze imposed just before the Brexit referendum triggered a jump in inflation, but also by years in which the adjustments coincided with a brief dip in inflation.
In contrast, the state pension has received generous treatment under the so-called triple lock that guarantees it will rise in line with the highest out of earnings, inflation or 2.5 per cent. Over a 50-year period, this has meant that a pension initially paid at the same rate as unemployment benefits is now worth about twice as much.
Sunak has confirmed the government remains committed to maintaining the triple lock on state pensions. But ministers have hinted they could limit the cost of next year’s pension increase by tying it to a measure of annual earnings growth that excludes bonus payments. This stood at 7.8 per cent in the relevant months of May to July.
This would save an estimated £900mn compared with using the usual measure of total earnings growth — which stood at 8.5 per cent in the same period. It was boosted by one-off awards to NHS and other public sector workers.