Raising benefits in line with earnings will make the poor worse off – here’s why

Amid the ongoing turmoil of UK politics, there has been much talk of how fair the British social security system is. In the wake of a series of mini-budget U-turns, the chancellor of the exchequer, Jeremy Hunt, has affirmed that “there will be more difficult decisions to take on both tax and spending”.

The government has refused to confirm whether social security benefits will be raised in line with inflation. Several high-profile Conservative MPs have voiced concern that higher benefit levels could undermine work incentives among benefit claimants. They contend it would be unfair to those who do not claim benefits for social security levels to rise faster than average earnings.

Such concerns run counter to the evidence. We know that more than two in five universal credit claimants are already in work. Previous attempts to use “a bit more stick”, as the former home secretary Suella Braverman recently put it, have not only failed, but proven counter-productive in helping people get into (more) paid work.

Amid the cost of living crisis, food bank use in the UK is soaring.
HASPhotos | Shutterstock

The UK already has the lowest net replacement rate in unemployment benefit (the proportion of previous in-work income that is maintained in unemployment) in the G7 and one of the lowest among the Organisation for Economic Co-operation and Development (OECD) countries. There is very little left to cut.

Poverty, meanwhile, is rising considerably. Raising benefits in line with earnings, and not inflation, would make an incredibly difficult situation even worse for low-income households over the coming years.

People on benefits are getting poorer

The level of unemployment benefit in the UK is currently worth less than it was in the early 1990s; 2022 has seen its biggest real-term cut in 50 years. As a result, working-age social security, particularly for those without a limiting health condition or disability, has fallen further away from average earnings since 2010. Working-age benefit recipients are getting poorer compared with those on average earnings.

By contrast, the value of pensioner benefits has steadily grown in real terms and as a ratio of average earnings over the same period. Different parts of our social security system are thus on radically different trajectories. This inevitably has differing implications for poverty risk and rates over time.

Despite the social security support introduced during the pandemic, research in 2021 found that many people on benefits did not receive enough to meet their needs. When asked about their current financial situation, many claimants struggled to cover the basics.

Respondents said they often resorted to taking out loans, seeking out charitable aid, relying on financial help from friends and family, or simply going without. Around one in five had been hungry and weren’t able to eat in the two weeks prior to being surveyed. Around a third were not able to afford fresh fruit and vegetables daily.

Other research bears this out. More than half (53%) of working-age adults experiencing food insecurity are on income or work-related benefits.

The UK’s social security system has long failed to meet the basic needs of people struggling on a low income. And the considerable increase to housing, food and energy costs we are now witnessing is only making things worse.

A little girl sits on a man's shoulders in a crowd of protestors holding banners.
People in Bath protest against the cost of living crisis in October 2022.
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Benefit levels not assessed on needs

People often think that benefit levels are related to meeting some level of minimum need, but this is not the case. The last, and only, official assessment of benefits adequacy was undertaken in the 1960s, and it had little effect on subsequent policy.

Instead, benefit levels have been determined by other political priorities.
In 1973, the Conservative government under Edward Heath introduced a statutory duty to increase social security benefits and pensions annually. An important shift, in the early Thatcher years, was to link many social security benefits to prices. At the time, this allowed the value of social security to fall behind wages, which in turn had a large effect on widening income inequalities. Because prices were not rising as fast as wages, those claiming unemployment benefit fell further behind the working majority. So depending on the period in question, raising benefits either in line with inflation or with average earnings will mean profoundly different things, depending on the economic context.

Understanding quite what guides the government’s approach to choosing how to raise benefits is crucial. The options, known as uprating choices, compound over time and can drastically alter living standards for those who rely on means-tested social security. Do we, for example, want to maintain current levels of inequality or reduce them? Does maintaining a certain standard of living or reducing poverty matter most? Or, instead, is public finance affordability the key priority?

Since the 2010s, policymakers have based their decisions on how much to raise benefits in reference to what they say the state can afford, and of “fairness” between “unemployed benefit recipients” on the one hand and “working taxpayers” on the other. This is a false distinction. It doesn’t reflect the reality that all social security claimants are also taxpayers and that a considerable minority is also in work. Despite this, many working-age benefits and tax credits were raised below inflation in the 2010s, starting at 1% from 2013, before being frozen altogether, from 2016 until 2020.

This laid the groundwork for the government to refuse to raise benefits as a way of cutting public spending. Even in the current context of high inflation and squeezed living standards, the government’s guiding principle for whether or not to raise benefits continues to be “balancing the books” – and not maintaining living standards or reducing poverty.

Most people – and more than two-thirds of the over-65s – support raising benefits in line with inflation. If social security is about maintaining living standards, doing so, as soon as possible, is imperative. Of course, this will not address the longer standing issue of whether the benefits system is adequate or “fair”. It will do little to close a widening economic gap if social security doesn’t keep pace with inflation.

But if the government is talking about raising benefits separately to the cost-of-living crisis, that is because it bases its rationale for setting benefit levels not on what people actually need but on what it says the welfare state can afford and who should get what out of it. Indeed, much of the cost saving from austerity measures introduced since 2010 has been largely offset by tax cuts.

Fiscal and social responsibility can go hand in hand. If we want a fair and adequate social security system, we cannot continue cutting the resources of those who already have the least. Affordability is a question of political and policy priorities. Ignoring the need to preserve and improve living standards for people claiming social security will have dire consequences for low-income households across the country.

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