A spike in inflation is due to blow a £3 billion hole in Britain’s welfare budget, the country’s leading public finance analysts said.

The 16-year peak in inflation registered last month has direct consequences on public spending, since pensions and benefits are uprated each year by a figure based on the September retail price index (RPI).

Higher-than-expected food and energy costs mean that Alistair Darling must now find extra billions to help pensioners and claimants to keep pace with household bills.

Gemma Tetlow, a senior research economist at the Institute for Fiscal Studies, said yesterday: “With this inflation outturn, the Government may find itself spending around £3 billion more next year on benefits than it thought at the time of the Budget.”

With most experts predicting that unemployment will outstrip government forecasts, the welfare bill is almost certain to rise still further in the coming months. The additional cost will go straight on to public borrowing, since the Treasury picks up the benefits and pensions bill, already estimated at £131.9 billion this year.

Mr Darling, who is coming under growing pressure over the deteriorating state of public finances, will pave the way for swingeing increases in the Treasury’s already high borrowing by tearing up the existing limits that cap the Government’s total debt at 40 per cent of national income. He will announce new borrowing rules when he gives the annual Mais Lecture, rescheduled to October 29.

Independent experts gave warning that public borrowing could top £100 billion within two years as the Treasury soaks up the costs of the downturn.

Chris Grayling, the Shadow Welfare Secretary, said that the additional inflation costs to the welfare budget were “an early warning alert” of trouble ahead. “This is just the first of a whole pile of bills dropping at the Government’s door over the next few months,” he said.

In March Mr Darling estimated that the RPI would be 3.25 per cent in September. In fact it was 5 per cent. The index is used to calculate the basic and second state pension, and some disability benefits.

In the same Budget, the Chancellor calculated public spending on the basis that the Rossi index, named after Sir Hugh Rossi, the Minister for Social Security in 1981-83, would be 3.75 per cent. In fact the index, which is used to set benefits such as jobseekers’ allowance was 6.3 per cent last month.

The leap in the Rossi index complicates Treasury calculations further: the index strips out housing costs, and is usually expected to rise at a slower rate than the wider RPI measure, which includes housing costs. This year, with house prices falling and the housing market depressed, the Rossi has risen at a faster rate than the RPI.

The Treasury forecast is that there will be just under a million unemployed claimants by the end of next year. But a consensus of City experts suggests that the true total may be 1.4 million, adding as much as 40 per cent to the jobless benefit bill.

A spokeswoman for James Purnell, the Welfare Secretary, said that officials had been tracking the rise in the key measures, and insisted that he had therefore not been taken by surprise.

The Department for Work and Pensions was preparing for a “range of scenarios” to cope with rising unemployment, but was determined not to abandon plans to tie benefits more closely to jobseeking, she said.

Last night Mr Purnell and the Skills Secretary, John Denham, announced in a joint statement that an extra £100 million is to be made available to retrain workers who lose their jobs in the forthcoming economic downturn. The money will come in part from the European Social Fund.

In a further indication that ministers are preparing for a recession, the Government said that the cash would be targeted at, among others, workers in sectors “experiencing significant job losses”. Mr Purnell said: “At a time like this, we need to do everything in our power to help people who lose their job. The clear message I want to send to people is that there is help out there if the worst happens and they find themselves unemployed.”

Help the Aged said that the increases in benefits were “too little, too late” to help pensioners who had been the worst affected by the recent surge in the price of food and fuel.

Mervyn Kohler, a special adviser for Help the Aged, said: “Although 5 per cent is large by the standards of recent years, it totally fails to reflect the dramatic increases pensioners are facing in food and fuel. Research released last week showed our oldest and poorest pensioners face an inflation rate of around 9 per cent, far higher than the general rate of inflation.”

Gordon Lishman, of Age Concern, said: “The official inflation rate simply does not reflect the reality facing millions of pensioners. The Government must respond to these exceptional times by introducing an emergency package of measures to help the most vulnerable pensioners through this winter.”

The financial position as it was at Budget time has been worsened by a series of giveaways since then. In May, Mr Darling chose to cut income tax for most basic-rate taxpayers, at a cost of £2.7 billion, in response to public anger over the scrapping of the 10p rate.

Then in July the Chancellor helped motorists by suspending an increase in fuel duties at a cost of £600 million. Two months later he announced a one-year suspension of stamp duty on properties worth between £125,000 and £175,000 that cost a further £300 million. This will increase borrowing this year by £4 billion at a time when falling tax revenues threaten to leave an £18 billion shortfall.

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