People on Universal Credit who have children could face a real-terms benefits cut of £1,000 a year if the government chooses to increase benefits in line with earnings instead of inflation, a think tank has warned. The Department of Work and Pensions (DWP) has been told that low-incomes families with children will be the worst off if the government moves forward with the proposals.
So far, the government has refused to rule out uprating benefits by earnings growth. But it will be up to new chancellor Jeremy Hunt to deliver the verdict during his fiscal statement on October 31.
The Resolution Foundation said uprating by earnings would amount to a real-terms cut, which would set the typical incomes of the poorest fifth of UK households back to levels not seen since 2001.
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The Conservative Party has been split over whether it should raise benefits in line with inflation or the lower measure of earnings. Uprating benefits in line with the recent earnings growth – 5.5 per cent – would save the Treasury £3 billion by 2026-27. However, September’s CPI rate is expected to be around 10 per cent, the Resolution Foundation said.
Decisions on benefits uprating would usually be announced in November, with any change to come into effect the following April.
Analysis from the Resolution Foundation predicts that, if benefits are raised in line with earnings, working parents who receive Universal Credit and Child Benefit would be hit the hardest and be set to lose almost £1,000 a year. 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 would be set to lose more than £500, the think tank said.
It also 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. The income of a typical person in the poorest fifth of the population was already set to fall by 11 per cent in 2023-24 – the biggest drop since records began in 1962, according to the think tank. This is based on uprating benefits by inflation, and is predicted to deepen to 14 per cent if benefits are only uprated by earnings.
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 per cent, the government raised benefits by only 3 per cent 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.”
Former chancellor Kwasi Kwarteng was set to announce the government’s decision on uprating benefits during his medium-term fiscal plan later this month, Downing Street had confirmed. However, Mr Kwarteng was sacked by Prime Minister Liz Truss on Friday after his mini-budget triggered weeks of market turmoil.
Now, new chancellor Jeremy Hunt has been appointed to rethink the budget, so it will be up to him to deliver the government's new plans for the economy on October 31.
Former chancellor Sajid Javid is one of many MPs to have voiced concerns about the government's plans for benefits. “People are going through incredibly challenging times. We can all see that in our community. So I personally believe that benefits must stay in line with inflation,” he told BBC Radio 4 earlier this week.
Baroness Philippa Stroud, Tory peer and chief executive of the Legatum Institute, added that benefit payments must go up in line with inflation as “you don’t build growth on the back of the poor”. Work and pensions minister Victoria Prentis insisted no decision has been made on Tuesday.
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