Benefits are on track to be hiked by around 4 per cent next year – lower than the increase in the state pension – due to higher than expected inflation.
The Treasury expects official figures will confirm September’s rate of inflation will rise from 3.8 per cent to 4 per cent – the highest since January last year – in figures released on Wednesday.
The figures, which could cause higher government spending than planned, put even more pressure on Chancellor Rachel Reeves ahead of her Budget next month.
It comes after Government borrowing in September hit the highest level for five years at £99.8bn between April and September – £7.2bn more than forecast, and £11.5bn higher than the same period in 2024.
The Chancellor is already expected to raise taxes and cut spending as she struggles to fill a blackhole in the nation’s finances estimated to be £22bn.
A spike in inflation will also result in a peak in the rising cost of living for UK households – something the Chancellor is under pressure to grapple with, and potentially delay further interest rate cuts, which would bring down mortgage costs.
It all adds up to bad news for the Chancellor and Keir Starmer, who have made putting more money in people’s pockets a key test of this Parliament.
Questions over the triple lock
The Bank of England is seeking to bring inflation down to its 2 per cent target rate, but the Chancellor has already put pressure on government ministers to do their bit to help.
September’s inflation rate is used to decide the level of increase for many benefits, such as universal credit, tax credits and disability benefits, subject to formal review by the Department for Work and Pensions.
This means that a single person on standard Universal Credit allowance would see their income rise from £400.14 a month to £416.15 in 2026.
But the rise in the pensioner benefit – known as the state pension – is calculated using different means.
The state pension triple lock means the income for retirees will rise by 4.8 per cent – above inflation – as it is calculated based on the highest of average wage growth, September inflation or 2.5 per cent. This year wage growth is the highest.
Bank of England Governor, Andrew Bailey who has warned of a possible new crisis Alastair Grant/Pool via REUTERS/File PhotoThe Institute for Fiscal Studies (IFS) said the triple lock made it harder to plan public finances – and benefited better-off pensioners far more than the poorest – as it joined a chorus of groups urging the government to replace the mechanism with something more sustainable.
A Research note published by the IFS warned the Government is spending an additional £12bn each year as a result of the triple lock. It proposed replacing it a link to workers’ wages only, to avoid a ratcheting effect caused by using the highest of three figures.
But Downing Street doubled down on the decision to keep the pension mechanism, arguing that the policy was ensuring pensioners live with “dignity”. No 10 dismissed the suggestion the triple lock jeopardises economic stability.
“This government is committed to ensuring pensioners enjoy the dignity and respect they deserve in retirement,” the Prime Minister’s spokesman said. “That’s why we’re committed to the triple lock with millions set to see their state pension rise by £1900 over the course of this Parliament.”
Reeves blames Brexit
On Tuesday, Reeves once again pointed the finger of blame at Brexit for leaving the UK with a “weaker” economy when she addressed business leaders at the Regional Investment Summit in Birmingham.
The Chancellor said she would use her November Budget to set out her “plans based on the world as it is, not necessarily the world as I might like it to be” as global volatility and a hike in defence spending “puts pressure on our economy”.
Exiting the EU had caused more damage than forecasters had expected at the time, with the expected downgrade of the budget watchdog’s previous assumptions likely to make her task of balancing the books even harder, Reeves said.
The Chancellor told reporters: “The Office for Budget Responsibility does the forecasts for the economy. When we left the European Union, or when we voted to leave, they made an estimate about the impact that would have.
“What they’ve done this summer is go back to all of their forecasts and look at what actually happened compared to what they forecast.
“What that shows – and what they will set out – is that the economy has been weaker and productivity has been weaker than they forecast, despite the fact that they forecast that the economy would be weaker because of leaving the EU…
“I am determined that the past doesn’t define our future and that we do achieve that economic growth and productivity with good jobs in all parts of the country.”
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The OBR’s assessment will be published in detail alongside the Budget, in which the Chancellor has already acknowledged she is looking at potential tax rises and spending cuts.
It comes as the Bank of England governor Andrew Bailey warned of a new financial crash, saying that “alarm bells” were ringing over the private credit market following the collapse of two US firms.
Giving evidence to the Lord’s financial services regulation committee he said: “We certainly are beginning to see, for instance, what used to be called slicing and dicing and tranching of loan structures going on, and if you were involved before the financial crisis then alarm bells start going off at that point.”
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