UK Politics

Benefits freeze - number crunching

Daily Mirror front page, 30/9/14 Image copyright Daily Mirror

As you would expect there has been loads of coverage in the newspapers of Chancellor George Osborne's undertaking to freeze working-age benefits for two years.

What is more unexpected is the figures that have been attached to this policy.

"This freeze in working age benefits saves the country over £3bn," the chancellor said (officials later said it was £3.2bn).

Treasury special advisors at the Conservative Party Conference in Birmingham said that this policy would affect 10 million households.

If we believe that, and I'll return to whether we do later, presumably that means that the average family will lose £320 (that's £3.2bn divided by 10 million).

But the Daily Mirror went with a big, front-page headline saying that the 10 million families would lose an average of £480, which would mean the exchequer would save £4.8bn over two years.

The Guardian, the Mirror and the Independent used the same example household, with the Guardian citing its figures to Conservative officials.

The example was a working couple with one child, with each earning £13,000 a year. They would lose £44 a year in child benefit and £310 a year in tax credits, the papers said.

Starting with child benefit, the household would get £20.50 a week, or £1,066 a year. Before yesterday's speech they would have been expecting that to go up by 1% next year in line with previously-announced plans to cap such benefits until 2016 (Labour is promising a 1% cap until 2017).

That would mean it would go up by £10.66 next year and £10.77 the year after. As a result of freezing the benefit, the family would be £21.43 worse off over two years.

The situation with tax credits is a bit more complicated, but for this household to be losing £310 a year from not getting its 1% uprating, it would have to be receiving about £31,000 a year in tax credits, which is well over the current cap on benefits.

Even if you compare the freeze not with the 1% cap but with inflation at 2%, the family would have to be claiming £15,500 a year in tax credits to be able to lose £310, which seems very high.

So it seems that the impact of this freeze may be being overstated. I've been trying to get hold of the officials in Birmingham - I'll let you know if they get back to me.

Update 2 October 2014:

Still no word from the officials in Birmingham, but many thanks to David Phillips from the Institute for Fiscal Studies, who reckons he knows how they reached their figures.

The first thing to say is that the current 1% uprating of working-age benefits runs out at the end of 2015-16, so the comparison should be between a freeze and a predicted inflation rate of 2%.

So, the difference in child benefit will be between the April 2015 figure of £1,076.40 and the amount you would get if you increased that by 2% in 2016 and 2% in 2017, which would be £1,119.90, an increase of £43.50 a year.

Now, clearly in the first year the loss would be only half that level, but that is where the figure comes from.

David Phillips points out that it doesn't quite work like this, though, because the weekly amount would be rounded to the nearest 5p, which would mean the amount uprated for inflation would actually be only £41.60 higher than the frozen amount.

So that's the simple bit. We now turn to the tax credits, which I am warned that nobody should try to calculate without the help of a proper benefits simulator.

David reckons that our example household will see their tax credits fall from the £385.32 they would have received if 2% inflation had been applied to just £74.36, a fall of £311.

This is not about the actual credits failing to rise - it's more about what happens to the thresholds. Apparently our notional family will take one hit from the threshold at which tax credits start to be withdrawn.

The family are already pretty close to the level at which they wouldn't be getting any tax credits at all. They are gradually withdrawn at a rate of 41p for every extra pound earned, but if the level at which the credits start to taper were frozen, that would cost the family £201 a year in 2017-18.

The rest of the loss comes from the maximum amount that can be paid in tax credits, which trickles down to cut their and everyone else's credits.

What this means is that while our family might have been expecting to just lose an amount of tax credits in line with inflation, they will actually lose about 80% of their credits.