Benefits must rise by twice as much to keep up with soaring inflation, says IFS

Benefits should increase by twice as much as planned to help lower-income households keep up with the soaring cost of living, a leading think tank has said.

The Institute for Fiscal Studies (IFS) said current government plans were not fit for purpose because inflation is expected to surge to 6 per cent while benefits will increase by just 3.1 per cent in April.

Many of the UK's poorest households will therefore see a 3 per cent decrease in their real benefit levels and living standards.

The IFS recommended raising benefit payments by 6 per cent in April instead of increasing them in line with last year's inflation rate as current government policy dictates. The change would mean pumping around £3bn more into the welfare system to protect low-income families.

Inflation will hit poorer households harder because they spend almost three times as much of their budgets on gas and electricity as the highest-income group.

Those in the lowest-income tenth will experience a rate of inflation about 1.5 percentage points higher than the highest-income tenth, the IFS estimated.

The think tank forecasts that tax rises and inflation will cut the real take-home pay of someone on £30,000 by £1,660 this year. A person earning £15,000 will see a real-terms pay cut of £860.

Boris Johnson and his chancellor are under increasing pressure from campaigners and MPs in all parties to announce measures to deal with the looming cost-of-living crisis.

Energy bills are forecast to jump by around £700 per year for a household using the average amount of gas and electricity. Energy customers will collectively spend £14bn more than they did in 2021, according to the IFS.

The cost of a host of other goods from clothing and food to electronics is also on the rise as global supply chains come under strain.

Compensating everyone affected by rising energy bills would be expensive and therefore government action should be targeted, the IFS said.

"We have become used to an era of low and stable inflation. But the way in which we increase benefits each April is not fit for the period of high and rising inflation we now face," said Robert Joyce, deputy director at the Institute for Fiscal Studies.

It would be preferable to raise benefits by the actual inflation rate in April. If that is 6 per cent it would cost an additional £3bn, or £4.5bn if the state pension were included. Doing so would compensate benefit recipients on average for higher costs, including energy costs.

Any increase would not need to be permanent because the way benefits increases are decided upon in subsequent years could be changed once inflation is lower and more stable, Mr Joyce said.

He argued that boosting benefits would be preferable to other, less targeted measures.

"Abolishing VAT on domestic fuel would, quite apart from the environmental downsides, cost £2.4bn per year while only reimbursing households for less than one fifth, on average, of April’s increase in energy costs," he said.

The report came as the boss of Britain's largest energy company warned that prices were set to remain high for 18 months to two years.

Chris O’Shea, the chief executive of British Gas owner Centrica, said the energy market “suggests that high gas prices will be here for the next 18 months to two years”.

There was no reason to think that energy prices would come down “any time soon” and action must be taken to help people unable to afford their bills, he told the BBC.

“When I talk to our customers and hear how distressed they are about the increases in prices that are coming, I think it is inconceivable that we don’t do something to help those people, but it has to be targeted at those people.

“It can’t be targeted at energy companies, it has to be targeted at those people who can least afford the price rises that are coming.”