The government is considering ending the automatic annual increase in benefits in line with inflation. If implemented, the move would see many benefits frozen for two years, then rising only in line with average pay.
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.
Newsnight understands that the new £14bn figure is entering into fractious government debate over how to make a further cut to the welfare budget – something occupying minds at the top of government.
Liberal Democrat resistance
The move, under which millions of claimants' benefits would eventually inch up at the same pace as average earnings, would affect a wide range of working-age benefits including jobseeker's allowance and housing benefit.
Chancellor George Osborne has told the Department for Work and Pensions (DWP) it must come up with the extra £10bn reduction to allow cuts to other government departments, due to begin in 2015, to stay at the level they are now, rather than go deeper.
Mr Osborne tried to refashion the link between benefits and inflation last September when inflation came in at an unusually high level – 5.2% – but he was beaten back by an alliance of the Liberal Democrats and the Work and Pensions Secretary Iain Duncan Smith.
But the possibility of freezing benefits will anger Liberal Democrat activists as they prepare to gather in Brighton this weekend for their annual conference.
Many in the party 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.
Historically benefits have often risen by less than wages, with inflation not typically as high as in recent years, and it is already falling this year.
One option now being weighed up inside government is the freezing of 90% of benefits – which officials estimate would make savings of £7bn in one year.
However, coalition sources suggest this is likely to be discounted as too harsh, since it would include disability benefits.
Senior figures are proposing a two-step change to the payment of benefits. At first there would be a freeze to a wide range of working-age benefits to last for two years. After that a new link would be introduced between benefit payments and increases in wages.
Officials said they did not want a huge increase in benefits should wages start to climb very sharply, so work was being done on the exact linking mechanism.
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.
Sources said they were mindful of the risk of pushing benefit claimants into poverty, but that there was potential for massive savings.
One benefit which will not be affected is the state pension. Pensions are now protected by a “triple lock” which means they will go up annually by either inflation, earnings, or 2.5%, whichever is higher.
Having introduced this measure, the coalition will not touch it. But all other benefits are not protected in this way.
Source: BBC News