Jeremy Hunt is under pressure not to hit welfare claimants with a double-whammy of cutting benefits at the same time as cost of living (col) payments end while also presiding over a bumper state pension increase.
The Chancellor is understood to be weighing up the impact of uprating welfare at a lower rate of inflation than normal given any cuts to people’s benefits would kick in at the same time as col payments end in April.
Mr Hunt is considering whether to pin benefit uprating to October’s lower inflation figure of 4.6 per cent, rather than the previous approach of using September’s figure, which this year was much higher at 6.7 per cent, as he seeks to raise cash for tax cuts in the Autumn Statement.
Meanwhile, pensioners are inline for a boost of up to 8.5 per cent due to triple-lock rules which takes the higher of inflation, wages growth or 2.5 per cent. This year’s wages growth of 8.5 per cent is likely to be twice the inflation figure expected next Arpil.
The Resolution Foundation told i it was “essential” for benefits to be increased in line with the higher September inflation rate, which is the usual measure used, rather than the lower October figure, “in order to prevent further income falls next year” as col payments end.
Eight million households are eligible for col support, worth £900 in total, from spring 2023 to 2024.
Mr Hunt is due to begin finalising the Autumn Statement package with Rishi Sunak over the weekend after the delivery of the final economic forecasts from the Office for Budget Responsibility (OBR) on Friday night
Treasury sources said the fiscal “headroom” – the amount Mr Hunt can spend without breaking his fiscal rule to get debt falling as a share of GDP in the fifth year of the OBR forecast – would be the key measure in the data that would determine whether he can pacify Tory calls for tax rises, and decide whether to uprate benefits and pensions in full.
The Chancellor appears likely to uprate the state pension at a much higher rate than benefits under the “triple lock” policy.
But he still needs to decide whether to give pensioners an 8.5 per cent rise, in line with wage growth leading up to September, or to strip out the impact of public sector bonuses, meaning pensions would increase by only 7.8 per cent.
Resolution Foundation economist Lalitha Try warned Mr Hunt against hitting poorer families who rely on welfare.
She told i: “While recent falls in the rate of inflation are welcome, Britain’s cost of living crisis is far from over, with a lasting legacy of high prices from our two-year inflation shock.
“The living standards outlook remains challenging, especially as the Government’s cost of living support payments come to an end.
“With prices having risen by around 14 per cent more for poorer families than for the most well off, it is essential that the Chancellor fully uprates benefits in line with the usual September inflation rate, in order to prevent further income falls next year.”
On Friday, Mr Hunt announced a £4.5bn fund for “strategic” manufacturing sectors including car makers, aerospace companies and clean energy firms.
Funding will cover a five-year period and become available in 2025, after the next general election.
The Chancellor is meanwhile facing continuing pressure from senior Tories for tax cuts, including to VAT for small businesses and VAT on fuel, as well as scrapping inheritance tax and raising salary thresholds.
Mr Hunt is not likely to raise income tax salary thresholds, despite Tory criticism that freezing them has pulled more people into higher tax bands – the “fiscal drag” effect – for fear it would be inflationary, Treasury sources indicated.
But he is understood to be considering halving the rate of inheritance tax and taking more small businesses out of VAT payments.
One former prime minister has backed calls for a cut in inheritance tax, writing in his Daily Mail column that it would help millennials and Gen-Z. He wrote: “We baby boomers had the full-fat pensions; we had the free university; we had the cheap housing.
“Those benefits allowed us to accumulate phenomenal wealth, as a generation, and in the name of intergenerational fairness it is right that more of that wealth should now be passed on to our descendants.”
A decision on a carbon border tax will not be announced at the Autumn Statement as cross-Whitehall negotiations continue.
Business Secretary Kemi Badenoch is said to be opposed to announcing the tax, which would slap tariffs on carbon intensive imports from countries like China and India to prevent the effective offshoring of emissions, due to global economic headwinds.
But a Treasury source said the move was still likely in future, with a potential announcement in the spring Budget.
