Inflation-linked benefits bill set to soar in 2012

BENEFITS will cost billions more due to soaring inflation, the Institute for Fiscal Studies (IFS) claimed yesterday.

Pensions, job-seekers’ allowance, incapacity benefit and severe disability allowance are all linked with consumer price index (CPI) inflation. Next April’s increases are calculated using September’s rate, the highest ever.

When the Office for Budget Responsibility increased its inflation forecasts for 2011 from 3.1 per cent last November to 4.3 per cent in March, it added at least £1.2bn to 2012’s expected social security and tax credits bill.

As CPI inflation has come in higher still at 5.2 per cent, the IFS believes £1.8bn more will be added to the bill.

For next year’s calculations, the government switched from the RPI measure – which came in at 5.6 per cent – to the highest of CPI, average earnings or 2.5 per cent.

As a result the basic pension will rise by £5.31 to £107.46 per week. It would have risen by 41p more using RPI.

However, business rates remain linked to the RPI.

A 5.6 per cent increase in rates amounts to £350m for retailers alone, according to the British Retail Consortium, which says that is the equivalent of the wages of 16,000 shop workers.