Britain’s welfare bill could rise by an additional £5.5bn in 2027 as higher-than-expected inflation threatens to deepen pressure on the public finances and complicate Chancellor John Healey’s first Budget.
Analysis by the Institute for Fiscal Studies, shared with The Telegraph, suggests the increase in benefit spending could exceed the Treasury’s existing budget assumptions by £2.2bn, according to forecasts published by the Office for Budget Responsibility ahead of the Budget.
The projected rise comes after official figures showed inflation accelerating to 3.5 per cent in September, its highest level in almost a year, up from 3.1 per cent in August. The figures were higher than initially projected, adding to the economic pressures facing households, businesses and the government.
September’s inflation rate is particularly important for public spending because it determines the uprating of many working-age benefits and the state pension the following April. The final cost will depend on the outcome of the statutory review and the precise benefits covered by the calculations.
The prospect of a larger welfare bill threatens to become a flashpoint ahead of Healey’s maiden Budget next Wednesday, as the Chancellor faces competing demands to support households, restrain borrowing and avoid further tax increases.
The Treasury has limited room to absorb unexpected spending pressures without making adjustments elsewhere in its plans. Higher benefit payments could therefore intensify the debate over whether the government should raise taxes, reduce spending or borrow more to meet its commitments.
Helen Whately, the Conservative shadow work and pensions secretary, blamed Labour’s economic policies for worsening the squeeze on public finances.
“Higher inflation means higher benefit bills, piling more pressure on the public finances while families and businesses are already struggling with rising costs,” she told The Telegraph.
“Labour’s tax rises and red tape are driving up costs for businesses. At the same time, the Government are handing out billions more in welfare, leaving hardworking taxpayers to foot the bill.”
The figures have also sharpened the political argument over the scale of Britain’s welfare system and whether spending should be redirected towards defence.
Kemi Badenoch, the Conservative leader, has repeatedly urged Prime Minister Andy Burnham to curb welfare spending and use the savings to strengthen Britain’s armed forces.
During Prime Minister’s Questions, Badenoch accused the government of allowing borrowing to rise without tackling the underlying spending pressures.
“We know where that leads. The only solution to the challenges facing our country is to cut spending and to cut borrowing,” she said.
“The out-of-work benefits bill is set to rise by £50billion under this Government. So will the Prime Minister get a grip and cut the welfare bill?”
Badenoch also argued that welfare spending, expected to reach about £160bn this year, exceeded the combined budgets for defence, schools and policing. Her comments underline the Conservatives’ attempt to make welfare reform a central test of Labour’s approach to fiscal discipline.
Burnham has resisted opposition demands for sweeping cuts, while ministers have argued that the welfare system must provide support for those who need it and help more people move into employment.
A spokesman for the Department for Work and Pensions said the government wanted a system that “incentivises work and supports those who need it most”, adding that the arrangements inherited from the previous administration had failed to provide sufficient support and opportunities to enter the labour market.
The department said it was already reforming the system through the Youth Guarantee, narrowing the gap between the standard and health-related rates of Universal Credit, restoring face-to-face assessments and investing a record £3.5bn in employment support for disabled people and those with long-term health conditions.
The spokesman added that the Work and Pensions Secretary was legally required to undertake an annual review of the state pension and working-age benefits, with final figures to be confirmed once that process was complete.
For Healey, the looming increase presents a difficult fiscal calculation. Higher inflation raises the cost of supporting households at the same time as it intensifies pressure on living standards and the costs faced by businesses. Cutting benefits could reduce spending but risk worsening hardship; raising taxes could generate revenue while placing further pressure on workers and employers.
The IFS estimate does not determine what the Chancellor will ultimately spend, but it highlights the risk that the government’s existing fiscal plans may be overtaken by the cost of inflation-linked commitments.
With the Budget approaching, the contest over welfare is becoming a broader argument about Britain’s priorities: how much the state can afford to spend, who should bear the cost and whether ministers can protect vulnerable households without placing an even greater burden on taxpayers.
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