Higher inflation means benefits pain for households, says IFS
State benefits for roughly 10m UK families will be reduced by £450 a year in real terms after inflation reached its highest level in five years on Tuesday, the Institute for Fiscal Studies calculated.
Traditionally, September's inflation figure had been used to increase benefit levels and tax thresholds for the following April.
The IFS said would result, due to the government's recent policy of freezing the majority of working-age benefits until March 2020, Tuesday's 3% rate of consumer price inflation would result in entitlements being reduced for affected households by an average of £130 more per year than originally indicated.
Tom Waters, a research economist for the IFS, said: "This morning's inflation figure, taken together with the latest inflation forecasts, means that the 4-year freeze on most working-age benefits is now expected to cut the benefits of 10m families by £450 a year in real terms – up from £320 back when the freeze was first announced."
He said the loss of the further £130 was "not the result of any deliberate decision" by Downing Street, but was more a result of the higher than expected inflation at the time of the policy being enacted.
"This illustrates a problem of setting benefit rates far in advance in cash terms – it leaves the actual generosity of future benefits sensitive not only to the government's active decisions but also to unexpected moves in inflation. It means that the risk of higher inflation – a risk that has now materialised – is being borne by working age benefit recipients," Waters added.
The first two years of the benefits freeze, announced in the Chancellor's 2015 Summer Budget, reduced the real value of affected benefits by a total of just 1% as inflation had been low, but events such as Brexit and the weakened sterling as a result of the referendum had gradually bled into higher consumer prices.
Waters' report said, "Today's inflation number, together with the Bank of England's latest forecast for what inflation will be next September, indicate that the next two years of the freeze will represent a further 5.7% real reduction. Hence, taking the four-years as a whole, the freeze is now expected to reduce the real value of benefits by 6.7%."
In short, by the end of the four-year period, benefits entitlements across the UK would be £4.6bn less per year.
"Not surprisingly, the largest impact is toward the bottom of the distribution, where households are more dependent upon benefits for their income," the report read.