Thousands on benefits will be worse off until 2025 as payments fail to keep up with inflation, IFS warns

Many people on benefits will be worse off until 2025 as payments fail to keep up with inflation, a think tank has warned.

Hundreds of thousands of people could be better off if they earned less due to the way the government’s cost of living payments will work, according to the Institute of Fiscal Studies (IFS). It said that adding more money is being spent overall than if benefits had been raised in line with inflation.

A system of flat-rate top-ups for benefits recipients will be used to attempt to plug this gap this year, but 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.

The annual uprating of benefits in April will “merely take them back to around the real level they were at a year earlier”, the IFS said.

Real benefit rates were 7.6% lower in 2022 compared with their pre-pandemic levels in 2019, and will be 6.2% lower in 2023 and 2.0% lower in 2024, the organisation added.

In its report, it said: “Astonishingly, it is not until April 2025 that benefit rates are set to recover the ground they lost over the autumn and winter of 2021 due to lags in uprating them with inflation.”

The lowest-income households are almost three times as exposed to energy costs as the highest-income households, the institute added.

Report author Sam Ray-Chaudhuri described the cost of living payments as a “crude patch” which is “no substitute” for fixing the problem at source.

Such payments, despite trying to “plug the gap” will “actually result in the government spending around £2 billion more on recipients of means-tested or disability benefits” in the next financial year than it would have had to if it had raised ordinary benefits in line with current inflation.

While childless families with no-one in paid work and on universal credit “tend to do especially well out of the crude, flat-rate arrangement”, almost half of all families with three or more children on means-tested benefits would have been better off if the government had not introduced cost-of-living payments, the think tank said.

It suggested that instead, the government needed to ensure normal benefits kept pace with inflation. It described the cost of living payments as “crudely targeted” and warned they will “create ‘cliff edges’ in the system”.

The report states: “Receipt of each of the three £300 instalments of the payment will be contingent on having been a universal credit recipient in a specific prior month.

“We estimate that, as a result, in each of the three relevant months there will be around 825,000 people who earn slightly more than is consistent with universal credit eligibility and who, as a result of missing out on the cost-of-living payment, end up with less income than other similar people who earn less.

“Equivalently, they could increase their own income were their earnings to be slightly lower.”

IFS research economist Mr Ray-Chaudhuri adds: “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.”

In response to the report, a Department for Work and Pensions spokesperson said: “This year we are increasing benefits and the state pension in line with September’s inflation rate of 10.1%, but we recognise the pressures of the rising cost of living, which is why we also delivered £1,200 of direct, targeted support to millions of vulnerable households last year, and will be providing a further £1,350 of support in 2023-24.

“In addition, our Household Support Fund continues to help people with essential costs.”