Government considering uprating some working-age benefits by earnings rather than inflation for April 2023

The Government is considering uprating some working-age benefits in line with average earnings growth rather than inflation in April 2023, according to a Resolution Foundation paper published on 13 October 2022¹. The think tank says the option has been discussed as a way to offset the cost of tax cuts announced in The Growth Plan, which it puts at £45 billion a year, of which £2 billion have been cancelled¹.

The paper states that uprating in line with recent earnings growth of 5.5 per cent, rather than CPI inflation of around 10.1 per cent, would permanently cut the real value of affected benefits by an estimated 4 per cent¹. It estimates savings of around £5 billion a year if applied broadly to all benefits except the State Pension and Pension Credit, or around £3 billion a year if legislatively protected benefits are excluded¹. The paper says the £3 billion figure could only be achieved by freezing some forms of support that were exempt from the benefit freeze of 2016-17 to 2019-20, which excluded parental pay, Maternity Allowance, bereavement benefits and benefit elements related to disability and care¹.

The Resolution Foundation says the change would affect 9 million households, 7 million of which contain someone in work, containing 30 million people¹. It estimates losses ranging from around £50 a year for one-child families getting only Child Benefit to £1,000 or more for some parents on Universal Credit, with in-work households losing more in cash terms because UC work allowances would also be cut¹. Its figures put the reduction at £52 a year for the first child and £34 for subsequent children on Child Benefit, £185 a year for the basic rate of UC for someone unemployed over 25, £380 for a single disabled adult on UC, £478 for a single parent in work with one child and £978 for a working couple with three children¹.

The paper notes that in May 2022, Rishi Sunak as Chancellor said benefits would be uprated by that September's CPI, subject to the Secretary of State's review, and that this is the usual custom and practice assumed by the Office for Budget Responsibility¹. It says the Government is due to publish a Medium-Term Fiscal Plan on 31 October expected to set out how it will get debt falling as a percentage of GDP¹.

The paper sets out four categories of benefit. The Basic State Pension is expected to rise with inflation under the triple lock, and the paper assumes Pension Credit follows it¹. A set of benefits mostly relating to long-term health conditions or disabilities, plus Carer's Allowance, Additional State Pension and Guardian's Allowance, must rise with prices at least, and changing that would require primary legislation¹. Local Housing Allowances, the benefit cap and Winter Fuel Payments are already permanently frozen by default¹. The remainder, chiefly Universal Credit and Child Benefit, do not have to be increased by law¹.

Source: Resolution Foundation¹

Why it matters for households

The paper says the affected benefits would be 4.2 per cent lower in 2023-24 than under inflation uprating and would remain permanently lower in future years¹. It estimates that 3 million households, 15 per cent of the working-age total, would face an annual loss of over £500, with 62 per cent of single-parent families and 55 per cent of families with three or more children in that group¹. It says 74 per cent of couples with children and 95 per cent of single parents would face income losses, along with 63 per cent of households containing someone with a disability and 38 per cent of households with mortgages¹. Half of working-age households in the North East, North West, Yorkshire and West Midlands would lose out¹.

The paper projects that even if all benefits are uprated with inflation, real disposable incomes of the poorest may fall by 11 per cent next year, the biggest drop on record, and by 14 per cent if some are indexed only to earnings¹. It projects absolute poverty rising by 2.9 million people between 2021-22 and 2023-24, with a real benefit cut adding another 600,000, including 300,000 children¹. It also notes the £400 Energy Bills Support Scheme will end in March¹. How rates rise each April, including uprating, CPI and past freezes, and how inflation sets increases to benefits, State Pension and tax thresholds, are set out in our guides.

What happens next

The paper says the decision for 2023 has to be made shortly, and that the Medium-Term Fiscal Plan is due on 31 October¹. It adds that the Government could announce the same approach for April 2024, when inflation to September 2023 is expected to be around 7 per cent and earnings growth may again be lower, though it says these projections are highly uncertain¹.