Benefit rates are unnecessarily tied to out-of-date inflation
measures. As a result, the rapid erosion of their real value over
the autumn and winter of 2021/2022 will, astonishingly, not be
redressed until April 2025. Compared with pre-pandemic levels
they will be 6% lower in real terms after this April’s annual
uprating, and will still be 2% lower even after the April 2024
increase.
These are among the findings of a new report from the Institute
for Fiscal Studies (IFS), which analyses the state of the cost of
living crisis ahead of Chancellor Hunt’s first Budget on
15th March.
A system of flat-rate top-ups for benefit recipients will attempt
to plug this gap during 2023–24. But the authors also find that
the crudeness of this approach, relative to simply uprating
benefits in a timely way, means that:
-
More than 600,000 working-age households on
means-tested benefits will still have less income in 2023–24
than if benefits had simply kept pace with inflation during the
crisis, despite the flat-rate ‘cost of living’
payments. Certain groups are systematically more
likely to lose out than others; these include families with
three or more children and families containing a disabled
person. These families tend to get more in benefits, meaning
flat-rate payments do less to compensate for inadequate
indexation. In addition, families with someone in paid work are
more likely to lose out because their work allowances (the
amounts they can earn before universal credit is withdrawn) are
rising with an out-of-date measure of inflation along with
their benefit rates.
-
‘Cliff edges’ are created whereby hundreds of thousands
of people could be better off if they earnt less. The
£900 cost of living payment for universal credit recipients
will be paid in three roughly equal instalments. Eligibility
for each will depend on being on universal credit in a specific
prior month. In each of those three months there will be about
825,000 people with earnings slightly too high for their family
to qualify for universal credit who will end up with a lower
family income than people who earn a little less (because the
latter group will qualify not only for some universal credit,
but also for the full flat-rate cost of living payment).
Because ordinary benefits are tapered away gradually, rather
than all in one go when income exceeds a certain threshold,
simply uprating benefits in line with up-to-date inflation
measures would have avoided these additional cliff edges in the
system. Finally, these cliff edges can create an unfairness
whereby people with volatile earnings miss out entirely simply
because their earnings happen to be high in the ‘wrong’
month(s).
-
The government spends more money overall. In
2023–24 the government will, due to the flat-rate cost of
living payments, spend about £2 billion more on recipients of
means-tested or disability benefits than if it had simply
raised benefits in line with inflation in a timely way
throughout this crisis. That this is the case, despite the
substantial number of people who are left without full
compensation for the lack of timely indexation, illustrates how
blunt an instrument these payments are.
Sam Ray-Chaudhuri, an IFS Research Economist and an
author of the new report, said: ‘Income from the state
is typically price-indexed, or better. One might therefore have
thought that those who get income from the state would be much
more comprehensively protected from the spike in inflation than
other groups. But that would be to oversimplify considerably,
because benefits are increased in line with out-of-date inflation
measures. The introduction of universal credit offered an
opportunity to rectify this administrative anachronism, but it
has not been taken. It was clear as soon as inflation surged in
Autumn 2021 that deficiencies in benefit uprating procedures, if
not remedied, were going to cause problems for claimants and
policy headaches for government. It is high time that the
government got ahead of this entirely foreseeable problem, and
brought its way of price-indexing benefits into the
21st century. The crude patch that it will apply over
the problem in the next financial year, in the form of cost of
living grants, is no substitute for fixing it at source. And
under current inflation expectations, benefits will still not
have entirely regained their real value until April 2025.’
ENDS
Notes to Editor
The cost of living crisis: a pre-Budget briefing is an
IFS report by Jonathan Cribb, Robert Joyce, Heidi
Karjalainen, Sam Ray-Chaudhuri, Tom Waters, Thomas
Wernham and Xiaowei Xu.
