Stealth raid to cost families over £600 a year

The government’s decision to change the way support for families keeps up with rising prices is going to cost the typical family with children £614 a year due to reductions in Child Benefit and Universal Credit payments, according to new research from independent think tank the Resolution Foundation. This stealth raid will hit those on lower incomes hardest, leaving the typical family in the bottom half of income distribution £844 worse off.

In the 2010 Budget the Chancellor announced that from April 2011 the uprating of benefits, tax credits and public service pensions would be based on the typically lower Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI). The report, Shrinking Support: what Universal Credit indexation means for living standards, forecasts what this change will mean for family budgets in the five years after the introduction of the new Universal Credit.

The new analysis refutes the government’s claim that moving to the lower CPI is fair because it is “a more appropriate measure of… recipients’ inflation experiences than RPI”, arguing that:

•  CPI may be a more accurate reflection of price increases faced by those in social housing and reliant on Housing Benefit and Council Tax Benefit
•  But RPI, which includes mortgage payments, rents and council tax bills, is a more accurate measure of inflation for low to middle income families who qualify for Child Benefit or reductions in in-work tax credits

Previous Resolution Foundation research has shown that over the last decade people on low to middle incomes have faced significantly higher inflation than official figures suggest as they spend more of their income on essentials such as food and fuel, which have been increasing in price far more than general inflation.

Matthew Whittaker, Senior Economist at the Resolution Foundation said:

“The decision to increase support for families in line with CPI rather than the RPI may seem like a small change, but the losses felt by households will grow rapidly over time, biting hardest towards the bottom of the income distribution. Inflation may have fallen, but prices are still going up and wages are not, so this stealth change is going to hit family budgets hard. If support had continued to grow in line with RPI, low to middle income families might just about have been able to hang on to their current standard of living; instead it is projected to fall.”

ENDS

Notes to editors

1. The report, Shrinking Support: what Universal Credit indexation means for living standards, is written by Matthew Whittaker, Senior Economist at the Resolution Foundation and is available in advance from the Resolution Foundation press office and once published will be available to download from www.resolutionfoundation.org

2. In November 2010, the government announced its intention to integrate a range of in- and out-of-work benefits and tax credits into a single ‘Universal Credit’ payment for working-age adults. Assessments of the new system suggest that it will produce a complex mix of winners and losers

3. Cash losses are average change in annual after-tax income after 5 years (2018-19) of Universal Credit by equivalised income decile (all families with children)

4. “typical family” is defined as average for fifth decile (equivalised income deciles)

5. “typical family in the bottom half of income distribution” is defined as average for third decile (equivalised income deciles)

6. On average RPI was 0.8 percentage points higher than CPI between 2000 and 2011

7. In the 2000s, the cost of the essential basket of goods went up by 43%, significantly more than either measure of inflation (RPI 35% or CPI 27%). See Priced Out: The new inflation and its impact on living standards http://www.resolutionfoundation.org/publications/priced-out/