UK Weighs Curbing Benefits Rise to Give Room for Spring Tax Cuts

UK Chancellor of the Exchequer Jeremy Hunt is considering cutting benefits in real terms to free up cash for tax reductions ahead of a general election expected next year, people familiar with the matter said.

(Bloomberg) — UK Chancellor of the Exchequer Jeremy Hunt is considering cutting benefits in real terms to free up cash for tax reductions ahead of a general election expected next year, people familiar with the matter said.

Cost-saving options drawn up for the chancellor ahead of a fiscal statement on Nov. 22 include breaking with the normal practice of lifting working benefits in line with inflation, according to the people, who spoke under condition of anonymity about private deliberations. The aim is to give Hunt the maximum room to cut taxes in his spring budget, they said. 

The government said in a statement that it had protected the most vulnerable people from inflation with a 10% benefits rise this year, and would make a decision on next year’s uplift in the fall, “using the most recent data available.”

Prime Minister Rishi Sunak must hold an election in January 2025 at the latest and is under growing internal pressure from his governing Conservative Party to lower taxes after he and Hunt oversaw their rise to the highest level since World War II. But higher interest rates have wiped out Hunt’s fiscal headroom, giving him little scope for giveaways this year.

At the same time, curbing payouts to poorer people amid an ongoing cost-of-living crisis is likely to open up Sunak and Hunt to accusations of callousness. That’s especially the case as for now the government says it is sticking to the so-called triple lock. That guarantees payments to pensioners — who are typically wealthier and more likely to vote Tory — go up by inflation, the rise in wages or 2.5%, whichever is highest.

There are some early discussions taking place as to whether to tinker with the triple lock though this is seen as being far more politically risky, the people said. 

In March, the Treasury emerged with just £6.5 billion ($8.1 billion) of headroom, the smallest on record, and economists expect public finances to remain tight. That’s left the chancellor searching for more fiscal firepower, and Treasury officials believe finding savings through changes to the UK’s welfare system is key. 

Officials are hyper-focused on an internal target of getting 1 million people back to work, one person said. This week, Work and Pensions Secretary Mel Stride announced welfare changes that would make it harder for working-age Britons with “limited capability” for work to get disability benefits.

The government has operated under the principle that working-age benefits should be protected against inflation but rise by less than wages to strengthen the incentives to work. Since the cost-of-living crisis escalated after Russia’s invasion of Ukraine in early 2022, benefits and wages have increased by roughly the same amount.

Some in government believe it was a mistake for then-premier Liz Truss to raise benefits in line with inflation last year, which hovered just above 10% at the time, despite intense political pressure to do so. 

Benefits typically are uprated every April using the previous September’s inflation data as a reference. Options being discussed at an early stage include lifting benefits by at least one percentage point below inflation, or raising them in line with projected lower inflation figures for next year, the people said, adding that talks are in an early stage, and no decisions have been made.

On current Bank of England forecasts for September inflation, benefits would rise by 6.9% in April 2024. At that point, Bloomberg Economics expects inflation to have fallen to around 3.5% and for wages to be growing by around 4.5%.

Benefits and wages have risen by about the same amount since April 2022. To keep them in line, the government would need to reduce next year’s benefits uprating to 4.5%. 

As about £100 billion is spent every year on working-age benefits, that would save the government about £2.4 billion. While the government has discretion to break the inflation link with those benefits, legislation would be needed to break the relationship between consumer prices and disability payouts, which account for about £25 billion of the total.

–With assistance from Alex Wickham, Joe Mayes and Philip Aldrick.

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