What would a cut in benefits mean in real terms for UK claimants? | Advantages
Downing Street has signaled that it must cut public spending by billions of dollars to pay for its remaining proposed tax cuts. He has so far refused to rule out making savings on the social bill. The possibility of a reduction in real terms in benefits – increasing them according to income rather than inflation – has sparked unrest among Tory backbenchers and anti-poverty campaigners.
How much is the service bill?
Working-age benefits in Britain cost £87.4billion in 2021-22, according to the Department for Work and Pensions (DWP). Of this, Universal Credit was the biggest chunk – £40.6billion, followed by Employment and Support Allowance (ESA, claimed by sick and disabled people unable to work) with £12.7 billion pounds. Disability benefits for people of working age are around £20 billion.
How many people receive benefits?
Around 5.5 million people are on Universal Credit in Britain, with around four in 10 working. There are approximately 1.7 million people on the ESA. Around 2.6 million people receive the Personal Independence Payment (Pip), the main disability benefit.
What is the process for determining the benefit rate?
Benefits are supposed to be increased using the Consumer Price Index (CPI) inflation rate as measured the previous September. The DWP conducts a formal review in October. The rate is normally announced in November and takes effect the following April. On this basis, benefits increased by 3.1% in April 2022, reflecting the September 2021 inflation rate, rather than the then inflation rate, which was closer to 9%. Benefits in Northern Ireland are generally kept on par with Great Britain.
So benefit claimants are already experiencing a reduction in real terms?
Yes. The April 2022 revaluation was the largest drop in the real value of the basic unemployment benefit rate in 50 years, according to the Joseph Rowntree Foundation (JRF). The government deflected criticism by arguing that claimants would “catch up” next year, when the September 2022 CPI inflation rate (around 10%) would be reflected in April 2023 benefit increases. Former Chancellor Rishi Sunak promised in May that would be the case.
Is the increase in benefits automatically linked to the prices of the previous September?
This is the convention, but in practice the government has considerable discretionary power. According to JRF, the government has cut the value of working-age benefits in seven of the last 10 years, including freezing them for four years between 2016 and 2020, even when prices rose.
How much would benefit claimants lose if benefits were increased based on September earnings (5.4%) rather than September CPI inflation (10%)?
According to JRF, a 5.4% increase in April would be the largest permanent reduction in real terms to the basic benefit rate achieved in a single year. He estimates that the poorest 10% of families would lose 2.6% of their income (£214 a year) once personal tax changes are taken into account. The richest 10% would earn 4.3%, or more than £5,000.
Government allies say only fair benefits should rise at the same rate as average incomes, and that a reduction will encourage people to find work.
Critics would say that’s unfair because it’s a catch-up rather than an upside. Claimants have seen the value of benefits decline massively in recent years and they are already paying a “poverty premium” for basic goods and services. There is no solid evidence that reducing their income will persuade them to find a job or a better paying job. The biggest obstacles are often the lack of child care, poor public transportation and, in fact, the lack of better paying jobs.
What would be the social impacts of real reductions in benefits?
More low-income people would be pushed into poverty, or deeper poverty. It would suck money from local economies – profits are largely spent on shops and small businesses – at a time when the UK could be in recession, hitting economic growth. Evidence from the past decade – in which austerity policies took £37billion out of social budgets – suggests it will hit the health and wellbeing of the poorest the hardest.
Will Britain’s 12.5 million pensioners be affected by a reduction in real terms in the value of benefits?
So far, Prime Minister Liz Truss has indicated that there will be no reduction in real terms in the level of the state pension next April. However, it might be difficult to explain why there should be a reduction for low-income working-age people, but not for pensioners.