Rising prices will worsen benefit freeze for low-income families, warns think tank

A leading think tank warns that rising prices following the fall in sterling in the wake of the Brexit referendum means millions of low-income families will experience a reduction in real income.

The Institute of Fiscal Studies say 11.5 million families in the UK will lose an average of £100 more per year on top of the £260 they will be expected to lose as a result of a benefit freeze.

Normally, many low-income families receiving government support in terms of benefits and tax credits would be at least partially protected against price rises by annual increases in line with the Consumer Price Index (CPI).

money £20 and coins The IFS warn rising inflation will worsen the effect of the 4-year benefit freeze on UK’s low-income families. Image: pixabay

However, in the July 2015 Budget, the government said most working-age benefit and tax credit rates would be frozen in cash terms for the next 4 tax years (to March 2020).

The measure was introduced as part of an attempt to reduce annual social security spending by £12 billion.

The IFS say that as the picture looked in March 2016, the 4-year benefit freeze meant 11.5 million families were expected to lose an average of £260 a year. This would result in a government saving of £3.0 billion in 2019-2020.

Inflation means benefit freeze is an even greater cut

However, in the light of the latest inflation forecasts from the International Monetary Fund (IMF), the policy now represents an even greater cut to affected benefits. The IFS say this means:

“The same 11.5 million families are now expected to lose an average of £360 a year (£100 a year more than expected in March), saving the government £4.2 billion in 2019-20 (i.e. an additional £1.2 billion over what was expected back in March).”

The think tank estimates families receiving more in benefits will suffer greater losses. If you take the 3.2 million families who only receive child benefit out of the equation, the average loss for higher inflation goes up to £140 a year.

This means, say the IFS, that low-income families will experience an originally anticipated average loss of £330 a year as an average loss of £470 a year.

Policy going in the wrong direction

The think tank notes that, “Setting benefit rates in cash terms rather than relative to prices is becoming something of a habit in the UK.”

However, they believe this is a move in the wrong direction for two reasons. First, from the government’s point of view, “this way of cutting benefits means the size of the cut and the saving to government depends on (unknown) future inflation.”

Second, from the point of view of the recipient, the purpose of benefits is to provide a minimum standard of living. This means their level should reflect the cost of the goods and services needed to support that standard. The IFS note concludes:

“While it is perfectly reasonable to argue – as the 2015 Conservative Party manifesto did – that the working age benefit system should be made less generous over this parliament, it is hard to see why the appropriate size of cut should be arbitrarily determined by the impact of movements in sterling on prices.”