Inflation link for annual benefit increases may be axed

Job centre Jobseeker's allowance is among the benefits that would be cut under the plan

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The government is considering breaking the link between inflation and the automatic annual increase in benefits, the BBC understands.

Many benefits - excluding the state pension - would be frozen for two years, with future increases pegged to average earnings rather than prices.

Jobseeker's Allowance would get an estimated £60, rather than the current £71 a week, as a result of the change.

A senior Labour MP warned millions of low-paid workers could lose out.

Dame Ann Begg, chairman of of the commons work and pensions committee, told BBC News: "More than 50% of benefits go to people in work but on the low pay end.

"So give the double whammy of lower wages and lower benefits and they are going to be hurt badly."

Wealth taxes

In recent years inflation has risen at a far higher rate than average earnings - Whitehall officials say a switch since 2008/9 would have saved £14bn.

The government needs to find £10bn of extra savings in the welfare budget.

But sources told the BBC Newsnight's Allegra Stratton that the detail of how to make these cuts had not yet been discussed. They would not be drawn on which policies were being looked at.

If Prime Minister David Cameron pushes ahead with the plan it is likely to spark a furious row between the Conservatives and their coalition partners the Liberal Democrats, who have repeatedly blocked moves to cut benefits.

Many Lib Dems believe the coalition should find the further £10bn of cuts through tax rises such as wealth taxes and there should be no further cuts to welfare.

An increasing number believe the welfare budget is already straining to bring in its current £18bn of cuts.

The IPPR think tank has estimated that had benefits been linked to earnings, not inflation, over the last few years, Jobseeker's allowance would be a weekly £66.81 rather than £71.

'Chaotic'

Sources said they were mindful of the risk of pushing benefit claimants into poverty, but that there was potential for massive savings.

"Benefits are rising faster than earnings; this does not encourage people to go to work. Benefits were never meant to be a salary replacement," one official told the BBC.

It comes amid reports Prime Minister David Cameron wants to "put the brakes on" planned reforms to the state pension, which would see the introduction of a flat rate of about £140 a week.

The reforms, announced in Chancellor George Osborne' s March Budget, would see the end of the state second pension.

But the Financial Times reports Mr Cameron has ordered a rethink over fears the move would alienate many Conservative voters including high earners who would no longer be able to boost their retirement incomes through the state second pension.

Commenting on stories about pensions and benefits, Labour's shadow work and pensions secretary Liam Byrne said: "Iain Duncan Smith's department is now so chaotic they can't even agree with themselves - with this shambles it's no wonder half the Cabinet wanted him sacked.

"If David Cameron and George Osborne want to start to fill the big hole in the public finances caused by the failure of their economic plan, they should start by looking at their tax cut for millionaires."

Labour leader Ed Miliband last week confirmed his party would be forced to cut benefits if it returned to power but would place the emphasis on "predistribution" to ensure the low paid got better paid jobs.

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