George Osborne plans to slice £1bn off the welfare bill by altering a long-standing procedure under which benefits are raised each year in line with September's inflation rate.
Inflation hit 5.2 per cent in September, and although it is expected to fall back rapidly, if the Chancellor follows convention it is the rate which should be used to set next year's benefit levels. Instead, he is looking at limiting the upgrade to the average inflation rate over the six months to September, which was 4.5 per cent. At a time when most private and public-sector pay rises are averaging well below 5 per cent, such a move would politically unpopular.
The savings, which would see disability benefit, carer's allowance, income support and jobseeker's allowance cut by about £50 to £100 a year, could be used to halt a planned 3p-a-litre rise in petrol duty.
Mr Osborne will announce the 2012-13 uprating, to come into effect next April, when he makes his autumn statement to Parliament on 29 November. The Treasury refused to comment but the TUC leader, Brendan Barber, attacked the proposal.