Chancellor should avoid the biggest overnight benefit cut in history and the biggest state pension increase in 30 years

The Chancellor faces a series of tough economic choices this Autumn – including whether to press ahead with the biggest increase in the state pension in a generation while delivering the biggest overnight benefit cut in history by cutting Universal Credit (UC) by £20 a week – according to new Resolution Foundation research published today (Monday).

The report – To Govern Is To Choose – notes that the Chancellor’s Autumn will be made significantly easier by a fiscal windfall, possibly amounting to around £25 billion a year, but sets out five key decisions he faces that may shape the rest of the Parliament, including:

• How much to uprate the state pension by;
• Whether to end the £20 a week uplift to Universal Credit;
• Which taxes will rise to fund social care reforms;
• What Government departments are set for further austerity; and,
• How the Treasury will get serious about delivering Net Zero.

On the first decision, the report notes that the combination of the Triple Lock and the vagaries of wage data (Average Weekly Earnings growth is set to exceed 8 per cent this summer) could prompt the biggest cash increase in the state pension since 1991.

Proceeding with such a large increase for pensioners because workers had exceptionally low earnings last year would be unjustified, says the report, and instead suggests applying the Triple Lock over two years or using an alternative underlying wage measure that would deliver a state pension increase of around 3-5 per cent. This would save £3-4 billion relative to the higher increase.

This decision is particularly important, says the Foundation, given that the Chancellor is also planning to end the £20 a week uplift to Universal Credit, which amounts to a £5bn cut for 4.4 million households containing 3.5 million children, from around 13 October.

This policy would be the biggest ever overnight benefit cut – larger even than the partially reversed Housing Benefit cuts of 1988. Only the disastrous 10 per cent cut to unemployment support at the height of the Great Depression in 1931 comes close.

With those affected typically set to lose over 5 per cent of their disposable incomes, and around one million households losing over 10 per cent, the Chancellor should change course and retain the uplift. Alternatively, the uplift could be retained but the higher entitlement frozen for four years, roughly halving the cost to £3 billion a year.

The report says that long overdue reforms to the funding of social care are no less controversial given the need for significant tax rises. The Foundation says the Government’s preferred approach of raising personal and employer National Insurance contributions would raise around £13bn for a 1p increase, but would disproportionately hit younger workers and wage earners.

To overcome some of these flaws the report recommends extending any new NI rise to working pensioners (raising £100m), increasing the threshold to £10,000 to protect low earners (costing up to £1bn) and increasing dividend tax and capital gains tax alongside NI (raising around £2bn).

While the Chancellor may choose to avoid a Budget this Autumn, a Spending Review will need to be delivered.

Two big decisions will be taken: how much emergency Covid-related funding to continue with into next year, and whether to scrap £16bn of cuts to post-pandemic spending relative to previous plans. Proceeding with these cuts would mean no progress being made in reversing post-2010 austerity for unprotected departments like local government and prisons.

Finally, the report says the Treasury will need to demonstrate its commitment to the Net Zero transition by showing that the cost of decarbonising home heating will not fall too heavily on low-income households, and completely overhauling road taxation this decade.

Torsten Bell, Chief Executive of the Resolution Foundation, said:

“The Chancellor has enjoyed a relatively quiet summer as the vaccine roll-out has taken centre stage, and good news has come in on the economy and public finances.

“But Rishi Sunak has some very big decisions to take this Autumn – from whether to deliver the biggest benefit cut in modern history, to funding long overdue social care reforms and showing he is serious about turning the UK’s Net Zero targets into reality.

“These decisions all involve huge sums of money, difficult trade-offs, and are likely to shape the living standards of millions of families for years to come. A busy Autumn lies ahead.”