Past time to end the benefits freeze
By Adam Butler, Senior Public Policy Advocate
The benefits freeze, which comes to an end next year, is the single biggest driver of rising poverty and has cost many StepChange clients hundreds of pounds each year — what should the government do next?
The Joseph Rowntree Foundation has released figures estimating that the benefits freeze will drive 400,000 more people into income poverty by 2020.
The freeze, which has been in place since 2016/17, means simply that most working-age benefits (other than disability benefits) are frozen in cash terms. This affects the almost one-third (30%) of UK households.
The Spring Statement will be overshadowed by political and economic uncertainty, but the government will need to clarify soon what will follow the scheduled end of the freeze in April 2020.
In its first two years, inflation was so low the impact of the benefits freeze was modest. However, inflation rose abruptly following the Brexit referendum: we estimate that the freeze cost our clients who receive social security on average £291 in 2017, and £399 in 2018 (or £24 and £33 each month).
To put that in perspective, the average budget surplus (the amount of disposable income available after budgeting for essentials) of clients who receive benefits is £31.
In other words, the freeze is wiping out what little disposable income many households in financial difficulty have.
It’s also worth bearing in mind that the annual increase in the value of working age benefits had already been held at 1% for three years from 2012/13 (Child Benefit was frozen for three years from 2011/12 and then increased by 1% in 2014/15).
The year-on-year effect of these changes can appear small but, because the impact of inflation on the value of benefits compounds over time, the cumulative effect is large.
As a result, the real value of most working age benefits has fallen to multi-decade lows.
How are benefits usually increased?
The way that different benefits are increased each year is complicated (and inarguably dull). Prior to 2011, most means-tested benefits were simply uprated in April using a measure of inflation called the Rossi Index (basically RPI minus housing costs) taken the preceding September.
From 2011, the government shifted the default index for uprating support to CPI, which it argued is a better measure of living costs than RPI.
CPI, however, tends to rise more slowly than RPI (the Office for Budget Responsibility estimated the ‘long-run’ difference between RPI and CPI to be 1.4% each year).
Universal benefits like Child Benefit have been uprated by convention in line with RPI and other benefits have simply been left to depreciate in value after they’re introduced.
The family element of tax credits, for example, was never increased from £545 each year after it was introduced in 2003/04.
Housing support works slightly differently and has been subject to repeated tinkering. Until 2011, the maximum Local Housing Allowance rates (which are used to calculate Housing Benefit) were linked to the middle of market rents.
From 2011, alongside other tweaks, this was reduced to the bottom third (30th percentile) of rents. The link with rents was then broken entirely: in 2012/13 rates were frozen, then uprated in line with CPI for one year (somewhat bizarrely since the CPI measure excludes housing costs) and then increased by 1% for the next two years until the freeze took effect.
The fall in the value of housing support in particular has squeezed the incomes of an increasing proportion of private renters.
Our recent Locked Out report found that Housing Benefit didn’t cover the rent of 90% of clients renting in the private sector.
How should the government increase the value of benefits in future?
Simply reverting to CPI and re-linking housing support to rents would be a step forward over a freeze. However, the value of social security for working age adults has been eroded so seriously, the question now isn’t only whether to end the benefits freeze but how to sustainably recover lost ground.
The benefits freeze sits alongside more straightforward cuts to support, such as reductions in the Universal Credit work allowances (not wholly reversed by the 2018 Autumn Budget), reduced support for children with disabilities in Universal Credit and changes to tax credits including the abolition of the baby and family elements and the introduction of a two-child cap on support.
These measures will bite household incomes hard in future years. Unwinding the effects of the benefits freeze must then be part of a wider conversation about the future of the social security system.
The ostensible justification for the freeze was that welfare payments shouldn’t increase in value if wages don’t. The risk of this approach is that it’s not sustainable if a core aim of the social security system is to meet minimum needs.
Household budgets for people managing with a low income tend to be formed of more essentials like housing, utilities and food, and less discretionary spending like consumer goods. Whatever else, support must be sufficient to allow people to meet these essential costs.
One further simple lesson highlighted by the Institute for Fiscal Studies is that unpredictable changes in inflation mean that it’s not a good idea to make arbitrary decisions about uprating several years in advance (unless investing in substantial increases as happened, for example, for child tax credits in the early 2000s).
A good place to start is to lay down the principle that, however ministers design the social safety net, it will meet and keep pace with the cost of living for those it supports.
You can find out more about our debt and housing research on our website.