Poorer families risk £1,000 hit from earnings-related benefits rise

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If the government raises benefits in line with earnings rather than inflation next year, it would drastically cut the incomes of poorer working-age families, while saving less than a tenth of the cost of recent tax cuts, a leading economic thinktank has calculated.

Such a change, which would mean a significant real-terms cut given that wages are rising at 5.5% with inflation close to 10%, could see the effective income of some families reduced by up to £1,000 a year, the Resolution Foundation said.

In a report, it said this decision would end up saving about £3bn by 2026-27, whereas the tax cuts announced in Kwasi Kwarteng’s mini-budget would cost about £40bn, even now that one of them – scrapping the top 45p rate of tax – has been reversed.

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While ministers appear committed to increasing pensions in line with inflation – under the so-called triple lock upgrade, suspended last year – they have yet to decide whether the same will apply to working-age benefits.

Jacob Rees-Mogg, the business secretary, said on Wednesday that no decision would be made before the next publication of inflation statistics, due in a week. A number of Conservative MPs, including other cabinet ministers, support an increase in line with inflation.

If the increase for working benefits such as universal credit was made at the lower, earnings-linked rate, this would affect 9m UK households, or 45% of those that include working-age people, the Resolution Foundation said.

The impact would vary considerably. The report calculated that a couple with one child who only receive child benefit would lose £52 a year. A single disabled adult on universal credit would lose £380.

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The biggest effect would be on low-income families with children. A working couple with three children would lose £978 a year, it said.

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Given that such benefits have failed to keep pace with inflation for nine out of the last 12 years, if the lower increase takes place in April, a typical person in the poorest quintile would see their income fall by 11%, back to levels last seen in 2000-01.

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This would, the thinktank said, also add to the numbers of people living in absolute poverty, defined as having less than 60% of the median UK income.

This is already forecast to rise by 2.9 million people between April 2021 and April 2024, from 17% of the population to 21%. The lower benefits increase would add another 600,000 people, the report said, among them 300,000 children.

Adam Corlett, head 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.

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“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.”

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