Working-age welfare: facing a four-year freeze

3 August 2015

Hidden amongst the Summer Budget’s headline policies was the announcement of a four-year freeze on working-age benefits from April 2016. The freeze excludes disability benefits. As such it is both an augmentation of the Coalition Government’s “historically unprecedented” three-year one-per-cent cap on working-age benefits and an elongation of the Conservatives’ proposed two-year freeze. The cap and freeze is intended to create a more affordable welfare system and ensure that work pays during a time when benefit inflation is outstripping wage growth.

The policy sounds recondite, but it will have profound consequences for those receiving social security. Since 1975, most working-age benefits have been uprated in line with at least price inflation to ensure they maintained their value. However, compared to a CPI-linked uprating policy, the cap and freeze will cause working-age benefits to lose 16 per cent of their value between 2010 and 2020—as the below chart shows.

This will mean that in 2020 unemployment benefit will be worth £550 a year less than it was in 2010. Child Benefit will lose £170 and, as the chart shows, fall to its lowest level since 1999. With the OBR forecasting earnings to increase by 4.5 per cent a year, both these benefits will fall to their lowest levels relative to earnings since systematic uprating began in the late 1970s.

Generosity of benefits

Over the same period, the ‘triple lock’ on pension uprating (the greater of 2.5 per cent, average earnings or CPI inflation) will result in the average State Pension award value increasing by £1200 a year. As the graph shows, this continues the State Pension’s long rise in value.

Freezing the value of working-age benefits will both ensure benefits grow at slower rate than average earnings and save the Government money in the short term. However, benefit cuts for working-age claimants alongside increases for pensioners raise questions over the Government’s pledge to spread the burden of austerity across society. Furthermore, as Reform has previously argued, such short termism simply erodes the standard of living for benefit claimants, instead of providing sustainable solutions in the long term. After years of real-term cuts, the Government should start to turn its attention to the latter.

Alex Hitchcock, Research Assistant, Reform

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