Reforms to the benefits system 'are a stealth raid on low earners'

The Government's plans to streamline the benefits system will hit the poorest claimants hardest, according to a study for The Independent.

The Resolution Foundation think tank found that the introduction of the Universal Credit in October next year will leave a typical family with children ?614 a year worse off, while a family in the bottom half of the income ladder will lose ?844 a year.

Its study is the first to take account of the Government's decision to uprate the benefit each year in line with the consumer prices index (CPI), rather than the retail prices index (RPI) which includes housing costs and generally rises at a rate almost 1 percentage point higher than CPI.

The blow to low-income households emerged amid growing doubts inside the Government about flagship reform by Iain Duncan Smith, the Work and Pensions Secretary, which will replace most working-age benefits with a single payment.

It is designed to cut bureaucracy and "make work pay" but the Chancellor, George Osborne, and some other ministers are increasingly nervous about the huge shake-up. "This is another car crash waiting to happen," one minister said. "There are doubts about the IT systems. We have to avoid another disaster like the NHS reforms."

According to the foundation, the changes could save the Government more than ?5bn a year within five years, an average of ?220 for every working family. Some 84 per cent of the savings will come from families in the bottom half of the income scale and 59 per cent from such families with children. Low-to-middle-income families will account for half the savings, even though they represent only one-third of the working age population.

Warning of a "stealth raid" on low earners, the study found that average income after tax for households heavily reliant on benefits would fall from ?10,400 to ?10,200 a year if Universal Credit were uprated in line with RPI.

In fact, their income will drop more sharply, to ?9,800, because it will rise in line with CPI. For those on low to middle incomes, annual average incomes after tax would have risen from ?15,800 to ?15,900 if the new benefit were linked to RPI but will fall to ?15,600 under the link to CPI.

"The impact looks entirely regressive when measured as a proportion," says the foundation's analysis. "The situation is even starker if we focus just on families with children."

The think tank urges the Government to think again about the impact on second earners, saying their work incentives would be reduced at a time when many struggling families need both parents to work.

Matthew Whittaker, the Resolution Foundation's senior economist, said: "The decision to increase benefit and tax credit payments in line with the CPI rather than the RPI is already having profound implications for millions of families.

"The losses felt by families will grow rapidly over time, biting hardest towards the bottom of the income distribution. While the roll-out of Universal Credit from next year is set to produce a number of 'winners', this assessment ignores the massive reduction in overall spending already secured by the Government."

The Department for Work and Pensions said: "Increasing benefits in line with inflation ensures that they maintain their value, and we believe that the CPI is the most suitable measure to use for benefit uprating.

"Around 2.8m households will receive more in benefits under Universal Credit than they do under the complicated current system. The new benefit will tackle disincentives to work, lifting around 900,000 children and adults out of poverty, and 80,000 families will gain access to childcare support for the first time."

In a Commons debate today, Labour will urge ministers to address "deep flaws" in the proposed system before it is too late.

Liam Byrne, the shadow Work and Pensions Secretary, said: "We know the project is running late and hugely over budget. The DWP has got to publish its secret business plan that they are trying to hide, so we can begin figuring out how to get this vital project back on track."