IFS - Many benefit recipients will be worse off until April 2025 because of failure of payments to keep up with inflation

22 Feb 2023 10:40 AM

Benefit rates are unnecessarily tied to out-of-date inflation measures.

As a result, the rapid erosion of their real value over the autumn and winter of 2021/2022 will, astonishingly, not be redressed until April 2025. Compared with pre-pandemic levels they will be 6% lower in real terms after this April’s annual uprating, and will still be 2% lower even after the April 2024 increase. These are among the findings of a new report from the Institute for Fiscal Studies (IFS), which analyses the state of the cost of living crisis ahead of Chancellor Hunt’s first Budget on 15th March. 

A system of flat-rate top-ups for benefit recipients will attempt to plug this gap during 2023–24. But the authors also find that the crudeness of this approach, relative to simply uprating benefits in a timely way, means that:

• More than 600,000 working-age households on means-tested benefits will still have less income in 2023–24 than if benefits had simply kept pace with inflation during the crisis, despite the flat-rate ‘cost of living’ payments. Certain groups are systematically more likely to lose out than others; these include families with three or more children and families containing a disabled person. These families tend to get more in benefits, meaning flat-rate payments do less to compensate for inadequate indexation. In addition, families with someone in paid work are more likely to lose out because their work allowances (the amounts they can earn before universal credit is withdrawn) are rising with an out-of-date measure of inflation along with their benefit rates.
• ‘Cliff edges’ are created whereby hundreds of thousands of people could be better off if they earnt less. The £900 cost of living payment for universal credit recipients will be paid in three roughly equal instalments. Eligibility for each will depend on being on universal credit in a specific prior month. In each of those three months there will be about 825,000 people with earnings slightly too high for their family to qualify for universal credit who will end up with a lower family income than people who earn a little less (because the latter group will qualify not only for some universal credit, but also for the full flat-rate cost of living payment). Because ordinary benefits are tapered away gradually, rather than all in one go when income exceeds a certain threshold, simply uprating benefits in line with up-to-date inflation measures would have avoided these additional cliff edges in the system. Finally, these cliff edges can create an unfairness whereby people with volatile earnings miss out entirely simply because their earnings happen to be high in the ‘wrong’ month(s).
• The government spends more money overall. In 2023–24 the government will, due to the flat-rate cost of living payments, spend about £2 billion more on recipients of means-tested or disability benefits than if it had simply raised benefits in line with inflation in a timely way throughout this crisis. That this is the case, despite the substantial number of people who are left without full compensation for the lack of timely indexation, illustrates how blunt an instrument these payments are.

Sam Ray-Chaudhuri, an IFS Research Economist and an author of the new report, said: ‘Income from the state is typically price-indexed, or better. One might therefore have thought that those who get income from the state would be much more comprehensively protected from the spike in inflation than other groups. But that would be to oversimplify considerably, because benefits are increased in line with out-of-date inflation measures. The introduction of universal credit offered an opportunity to rectify this administrative anachronism, but it has not been taken. It was clear as soon as inflation surged in Autumn 2021 that deficiencies in benefit uprating procedures, if not remedied, were going to cause problems for claimants and policy headaches for government. It is high time that the government got ahead of this entirely foreseeable problem, and brought its way of price-indexing benefits into the 21st century. The crude patch that it will apply over the problem in the next financial year, in the form of cost of living grants, is no substitute for fixing it at source. And under current inflation expectations, benefits will still not have entirely regained their real value until April 2025.’

The cost of living crisis: a pre-Budget briefing