People on low incomes at risk from indexation change

The government's decision to change the way benefits and tax credits keep up with rising prices will cost the typical family with children £614 a year, says a think-tank analysis.

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 consumer prices index (CPI) rather than the retail prices index (RPI) - typically producing a lower figure. The think-tank report looks at what this change will mean for family budgets in the five years after the introduction of the new universal credit.

Key points

  • Using the CPI rather than the RPI will reduce average incomes across all parts of the working-age income distribution. In cash terms, the impact will be greatest in deciles 3 and 4, with families in the third decile losing £505 a year in the fifth year of universal credit.
  • Measured as a proportion of the after-tax income, families in the lowest income decile face a reduction of 4 per cent, compared with less than 0.5 per cent for those in the top half of the income distribution.
  • The situation is even starker when focusing on families with children. Families in decile 3 face the biggest cash loss, of £845 in year five, while those in the lowest income decile face the biggest reduction (4.7 per cent) in their after-tax income.
  • The cash impact is broadly similar across the 'benefit-reliant' and low-to-middle income groups, with the switch to CPI reducing average annual incomes by £790 and £725 respectively. In contrast, higher-income families face an average reduction of just £130.

The report challenges the government's claim that moving to the CPI is fair because it is a more appropriate measure of people's inflation experiences. Although 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, the RPI (which includes mortgage payments, rents and council tax bills) is a more accurate measure of inflation for low-to-middle income families.

Source: Matthew Whittaker, Shrinking Support: What Universal Credit Indexation Means for Living Standards, Resolution Foundation
Links: Report | Resolution Foundation press release