UK May Switch Base Month for Benefits Rise to Save £2 Billion

(Bloomberg) -- The UK government is considering using October’s inflation number for next year’s rise in working-age benefits, two people familiar with official thinking said, a move that would hit low-income families.

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Ministers are waiting to see Wednesday’s inflation data before deciding how much to lift support for the roughly nine million households on working-age benefits from April. Convention is that the September data is used but the government has refused to make that commitment. Using October’s inflation rate — predicted to come in about 2 percentage points below September’s — would save roughly £2 billion ($2.5 billion) a year.

The decision is for Work and Pensions Secretary Mel Stride, who could use another indicator, such as raising benefits in line with earnings, according to the people, who requested anonymity discussing decisions that haven’t been finalized. The call will be taken in time for next week’s Autumn Statement.

Chancellor of the Exchequer Jeremy Hunt is trying to find savings to build up fiscal headroom for potential tax cuts next year ahead of an expected election. With the governing Conservatives trailing Labour by some 20 points in recent polls, backbench Tories are clamoring for sweeteners they can use to persuade voters to stick with them.

But Hunt has little fiscal headroom to play with. In March, he had just £6.5 billion, the smallest margin on record. That is estimated to have increased to £15 billion, still low by historic standards.

Bloomberg reported in September that Hunt was considering a real-terms cut in benefits to free up cash for giveaways. Options being discussed at that early stage included lifting benefits by at least one percentage point below inflation, or raising them in line with projected lower inflation figures for next year.

“The secretary of state is doing his review at the moment to decide the correct amount to up-rate benefits by,” Hunt told the House of Commons on Tuesday, referring to Stride. “All I would say is that if you look at this government’s record we did take the decision a year ago to up-rate benefits by inflation and we committed to £94 billion of measures to help families get through the cost of living crisis.”

If Stride does go for a lower uplift than September’s inflation number, it would hit 9 million households, many of which are working, according to the Resolution Foundation think tank.

Economists polled by Bloomberg expect consumer price inflation to fall to a two-year low of 4.7% in October, from 6.7% in September. The two percentage-point drop equates to a £2 billion saving on the annual bill for working-age benefits, which is currently about £100 billion. That saving could cover half the cost of scrapping a scheduled rise in fuel duty. The government has dropped the tax rise on motorists every year for over a decade.

The government is keen to keep benefits below the increase in the minimum wage to ensure low earners are rewarded more than those out of work. Hunt will announce an increase in the national living wage of about 7% to over £11 an hour at the Autumn Statement. Using the lower October number would also bring the rise in benefits closer to the Bank of England’s 4.25% forecast for broader wage growth next year.

Hunt is expected to announce a series of savings measures on welfare as part of “back to work” plans in next week’s Autumn Statement following a surge in benefit claims and a big increase in health-related inactivity.

New arrangements to make it harder to claim sickness benefits are expected alongside the decision on uprating. Health-related benefit reforms would potentially save hundreds of millions of pounds more and are likely to be presented as part of the government’s growth plan by incentivizing work.

The government also plans to break convention on the triple lock, which states that state pensions must rise by the highest of earnings, inflation or 2.5%.

This year, earnings are binding but distortions caused by one-off public sector bonuses to end a series of labor disputes saw the relevant measure hit 8.5%. The government is expected to strip bonuses out of the calculation and raise pensions by 7.8%, saving £1 billion.

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