Britain is in a “welfare crisis” in the wake of Rachel Reeves’s “benefits Budget” with a damning report claiming jobless families who take a raft of hand-outs would be £18,000 better off than neighbours on the national living wage. The Centre for Social Justice claims a three-child family in work who do not rely on benefits would need to earn £71,000 before tax to match the welfare income of an equivalent jobless family.

The respected think tank says that families on full hand-outs will get £18,000 a year more than the after-tax income of neighbours on the living wage following Ms Reeves’s abolition of the two-child benefit cap.

The report lands as Sir Keir Starmer is facing calls to fire the Chancellor for allegedly misleading the country about the state of the public finances ahead of her tax-raising Budget.

Ms Reeves is further accused of breaking the Labour manifesto pledge not to raise taxes on working people by extending for three years the freeze in the point at which people must pay income tax. There are also fears for the future of high street shops, restaurants and pubs, with many now facing higher taxes.

Shadow Chancellor Sir Mel Stride said: “Rachel Reeves delivered a benefits Budget paid for by hardworking people. She misrepresented the state of the public finances to distract from the fact taxes are going up by billions to fund a welfare splurge.

“Reeves has broken her promise not to increase taxes because she is too weak to stand up to her backbenchers. And she has misled the public about why she has done it.

“Having broken her promise, and the manifesto, her position is now untenable.”

Sir Mel has written to the Financial Conduct Authority, raising concerns that the “the Chancellor has been giving an inaccurate picture of the economic and fiscal context and this appears to have been driven by political considerations”. He has asked for a “full investigation by the FCA into possible market abuse by all those who would have had access to confidential information including at HM Treasury, and 10 Downing Street”.

Reform UK deputy leader Richard Tice said: “[The] Chancellor lied outright about the nation’s finances. Confidence has been shattered, making her position untenable, but this weak Prime Minister cannot be trusted to do the right thing.”

He has written to the Prime Minister, stating: “Households are getting poorer, whilst the economy faces grave danger with these extra risks. It is time to change course with a new Chancellor, to rebuild confidence.”

The Prime Minister will launch a defence of the Chancellor and her Budget on Monday, insisting it has set the right economic course for the country. But he will say the Government must go “further and faster” in pursuit of growth with an acceleration of the industrial strategy.

He will state: “Economic growth is beating the forecasts. With wages up, more in one year than in a decade of the previous Government.”

The PM’s intervention is unlikely to quell worries about the country’s spiralling benefits bill.

The Centre for Social Justice’s report warns that “expenditure on working-age health-related benefits will be £22.2billion higher in 2030-31 than it was in 2024-25”.

It says: “Britain is in the grip of a welfare crisis. There are now over five million people claiming welfare with no work requirements, while the number of people in payrolled work has fallen by 180,000 since October 2024.”

According to the think tanks’s analysis, a family with three children, with at least one parent claiming the average rates of Universal Credit, housing and health benefits including Personal Independence Payment, will now receive £46,000 by 2026-27.

Setting out what this means for Britain’s families, it warns: “A working family with one adult in full-time and another in part-time work on the national living wage would take home roughly £28,000 after tax – £18,000 less than the benefit income now available to an equivalent three-child family outside work on combined benefits. Matching that level of support through earnings alone would require a pre-tax salary of around £71,000.”

Former Conservative leader Sir Iain Duncan Smith, who founded the think tank, said: “Hiking taxes on working people to pay for £16billion in extra welfare spending is a bad choice… We must make work pay and as this Government loses control of a ballooning welfare budget it will ensure work does not pay.”

Joe Shalam, Policy Director at the CSJ, said: “Work is the best route out of poverty, but our welfare system grows ever more riddled with perverse incentives that trap people on benefits and fail to help them towards financial independence. This failure ripples through the generations, with children twice as likely to be in absolute poverty when growing up without seeing a parent go out to work each morning.”

A Government spokesperson said: “We disagree with these findings, and our analysis shows it pays more to be in work. We’re changing the broken welfare system we inherited by tackling perverse incentives that encourage sickness claims, increasing face-to-face assessments, and investing £1billion to help sick and disabled people into good, secure jobs.

“We’re prioritising getting people into good, secure jobs, and boosting living standards across the country. With almost three-quarters of children in poverty living in working households, we’ve abolished the two-child limit, and our child poverty strategy will lift 550,000 children out of poverty by the end of this parliament.”

However, an analysis by the Liberal Democrats claims the freezes in the point at which income tax must be paid by Conservative and Labour Governments could result in a “wage wipeout”.

It states: “A couple with one person earning £26,000 and another earning £60,000 a year are facing a total income tax hit of £26,800, accumulated from April 2022 under the Conservative party, until April 2031 when the current Government’s threshold freeze is expected to end.”

Lib Dem Treasury spokesperson Daisy Cooper said: “This was a hopeless Budget that has piled further strain on working families and our high streets – by stealth.”

A Labour Party spokesperson said: “Kemi Badenoch’s Conservatives have precisely zero credibility when it comes to the economy. The voters booted them out because they crashed the economy and sent mortgages rocketing. Now their only so-called ‘plan’ is to take us back to austerity with £47billion of cuts.