The government is looking at a number of way to reduce its deficit in the run-up to its fiscal plan scheduled at the end of the month.

If it decided to uprate working-age benefits in line with earnings rather than prices – such as Universal Credit next year – the Treasury could save £3bn by 2026/27, according to the Resolution Foundation.

It said this is less than some have suggested as it would exclude protected benefits such as Disability Living Allowance and Personal Independence Payments.

The think tank’s briefing The long squeeze assessed the impact on this for the Treasury as well as households, and for the latter, nine million (45% of working-age UK households or 30 million people) would be affected.

It suggested three million households (15%) would lose over £500 at a time when budgets are already stretched for low-to-middle income families amid the cost-of-living crisis.

Differing losses based on family make-up

The foundation said the scale of losses “range considerably by family”.

A couple with one child only receiving Child Benefit would lose £52 a year, while a single disabled adult on Universal Credit would lose £380. Low-income families with children would lose the most – a working single parent with one child would lose £478, and a working couple with three children would lose £978.

It said the decision on uprating comes after a long squeeze on working-age benefits, which have failed to keep pace with inflation in nine out of the last 12 years.

“If that continues next April it would leave basic unemployment support falling below its real terms level 40 years earlier in 1983/84”, Adam Corlett, principal economist at the Resolution Foundation said.

Meanwhile prices may be another 7% higher in 2023/24 than in 2022/23 when the government’s cost of living support payments such as the £400 energy rebate and £650 for households will have finished.

As such, it calculates that real incomes for the poorest will see a further significant fall next year. The income of the typical person in the bottom fifth of the income distribution was already on track to fall by 11% in 2023/24 – the worst drop on record since records began in 1962.

But this fall would deepen to 14% if the rumoured benefits uprating cut goes ahead.

‘Living standards stagnation’

These large income falls for poorer households would mean a large increase in absolute poverty levels and this figure is already projected to rise from 17% to 21% between 2021/22 and 2023/24 – an increase of 2.9 million people.

If a benefit uprating cut goes ahead, the foundation calculated another 600,000 people, including 300,000 children, would be added to this figure.

Corlett added: “Plans to cut benefits like Universal Credit by uprating them by less than inflation could save the Treasury low billions of pounds, but reduce the incomes of nine million households. Working parents who receive Universal Credit and Child Benefit would be hit particularly hard, with some losing up to £1,000.

“These cuts would come at a time when families are already set to struggle with rising prices, soaring mortgages, and the end of temporary support schemes. With benefits having repeatedly failed to keep pace with inflation over the past decade, this would see real income levels for Britain’s poorest families fall to levels not seen since the turn of the century.”