Saturday , August 13 2022
Home / New Economics Foundation / Over 10 million households will struggle to meet the cost of living next April

Over 10 million households will struggle to meet the cost of living next April

Summary:
Blog Over 10 million households will struggle to meet the cost of living next April The rising cost of living isn't going away. So why has is the chancellor's support package going to expire in the spring? By Sam Tims, Lydia Prieg 24 June 2022 No matter what we do for a living or where we live, many of us want pretty similar things: a warm home, knowing that our family and friends are safe, and the assurance that we will be able to cope with whatever life has in store. But as the rising cost of living bites into living

Topics:
New Economics Foundation considers the following as important:

This could be interesting, too:

Lars Pålsson Syll writes What’s the point of all science?

New Economic Perspectives writes New Economic Perspectives 1970-01-01 00:00:00

Robert Vienneau writes Nonsense Taught At MIT

Mike Norman writes Links — 11 August 2022 Part 1

Blog

Over 10 million households will struggle to meet the cost of living next April

The rising cost of living isn't going away. So why has is the chancellor's support package going to expire in the spring?


No matter what we do for a living or where we live, many of us want pretty similar things: a warm home, knowing that our family and friends are safe, and the assurance that we will be able to cope with whatever life has in store. But as the rising cost of living bites into living standards, these ideals feel more out of reach. Not only do one in six people now rely on a food bank, but last month the Prime Minister was informed of the case of Elsie, a pensioner forced to ride the bus all day to stay warm because she couldn’t afford to heat her home.

The government have responded in part to the growing gap between incomes and the cost of living, announcing three packages of support primarily to address escalating energy bills. First, households were offered a partial £150 council tax rebate and a £200 energy bill loan in February. Second, at the spring statement in March, the chancellor, who had introduced a rise to national insurance (NI) rates only six months before, announced that the threshold at which earners begin to pay NI would rise to the same level as income tax.

But neither of these interventions made use of the social security system, so neither targeted support to those households most in need. That is why the third support package announced last month was welcomed by left- and right-wing organisations as well as the anti-poverty sector. Alongside the expanded energy bill rebate (increased to £400, and converted from a loan into a grant), and the £300 one-off payment targeted at pensioners, families in receipt of means-tested benefits will receive an additional £650, and people getting disability benefits will get a further £150. This will be crucial to easing further hardship this winter, when the energy price cap is expected to rise by a further £800 to £2,800 a year. It could however rise further next January: Cornwall Insight predict the price cap will reach £3,000 by the new year.

Despite help from the government, the highest level of inflation in 40 years is forcing households across the country to cut back on their weekly shop and go without other essentials. We’ve produced new analysis which indicates that, come October, the bottom 75% of households will have seen the cost of living outpace their income since April 2021, on average.For the poorest households, many of whom will have already tightened their belts as far as possible, the cost of living between April 2021 and October 2022 will have increased by over 10 percentage points faster than their incomes (figure 1). In other words, the combined impact of all of the government’s one-off cost of living support is not enough to avoid a drop in living standards for the poorest quarter of households: they need 1.5 times more support than what they have been offered.

To measure the cost of living, we use the minimum income standard (MIS) as calculated by Loughborough University’s Centre for Research in Social Policy. Household budgets for different family types are calculated based on what the public thinks is needed for an acceptable standard of living. To estimate a household’s MIS in October 2022 and April 2023, we have applied inflation forecasts from the monetary policy committee’s May report to this basket of goods. Since then the Bank of England has increased its October inflation estimate to 11%. To enable fairer comparisons to the MIS, household income is grossed at the household level.

Figure 1: Three in four households cannot cover rising costs

The government’s latest response should be welcomed: if the chancellor had not intervened, the situation in October would be far worse. But when this one-off support runs out in April 2023 and prices haven’t dropped, our analysis shows that households will struggle to afford the essentials more than at any point since the minimum income standard was introduced.

In April 2021, before inflation began to rise, the incomes of the bottom quarter of households were already £550 a month below the cost of living, as measured by the MIS (figure 2). By April 2023, the shortfall for this quarter of households will have increased by 40% to £770 a month. Across all households under the MIS, the average shortfall between income and the MIS will have increased by £130 a month from £480 to £610.

Figure 2: Low-income households will see the gap between income and the cost of living increase by 40% next April

On average, the shortfall between income and the MIS for middle-income households will not have increased at the same rate as low-income households, but underpinning this average are two movements. We define middle-income households as those with incomes in the second and third income quartiles. Firstly, 13% of households on middle-incomes with an average income of £18,800 a year after housing and childcare costs (AHCC) already had incomes £60 below the weekly MIS in April 2021. This shortfall will have almost doubled to £111 a week by April 2023. The second movement is for households whose income will be under the MIS for the first time next April as a result of the rising cost of living. This group, which has an average income of £23,700 AHCC, will be pushed below the MIS, increasing the proportion of middle-income households under the MIS to 24%. However this new cohort is only below the cost of living by £40 a week on average.

In April 2021, before the dramatic rise in the cost of living, 8.9 million households could not afford life’s essentials on their incomes. Our new analysis estimates that this will rise to at least 10.5 million in April 2023, meaning 1.6 million more households (4.3 million more people) will struggle to afford the cost of living (figure 3). Should inflation surpass current estimates even more households will be unable to afford a decent stand of living. Even with the one-off government support this year, 9.9 million households (1 million more households; 2.9 million more people) will struggle to afford the cost of living in October.

Figure 3: Twice as many middle income households will feel the squeeze next year

We shouldn’t be surprised that families are so badly equipped to weather the cost of living crisis. Low-income households have been experiencing an income crisis for years. In the last decade, the government has cut funding for social security and wage growth has been relatively stagnant, despite increases to the minimum wage.

Now, three years into this decade, and with a pandemic and a cost of living scandal under its belt, low earnings and a weak safety net have forced this government to bolster our threadbare social security system several times. From the introduction of furlough and the £20 universal credit uplift during the pandemic, to the one-off support for energy bills announced this year, it is clear that there is no long-term plan to link social security to the cost of household essentials, or move to the long-promised high-wage economy.

It’s time to end the piecemeal approach to social security and build an adequate and responsive system of support for households. The temporary nature of the government’s support” creates a permanent climate of insecurity and anxiety” for struggling families, according to academics Patrick, Stewart and Warnock.

The first steps towards a long-term plan for social security should be to remove punitive and unethical policies like the two-child limit and benefit cap. The two-child limit prevents a family receiving any additional income from means-tested benefits for their third or subsequent children if they are born after April 2017. The benefit cap puts a maximum income on the amount of social security a family can receive, dependent on where you live. Over 100,000 families are already impacted by the benefit cap and this number is only going to rise. Two in three are single mothers who will not receive any increase in their benefits from April 2023. This will mean a real-terms cut of 10%. The government should abolish these policies.

In the long term, social security should provide a Living Income. Even with increasing payments by about 10% next April, families will still struggle to make ends meet. Inflation-based uprating cannot fix the income crisis while baseline levels (the starting points before uprating) are set at arbitrary and inadequate rates. The value of benefits should be fully linked to the cost of living which, coupled with automatically enrolling everyone onto the universal credit system, will ensure a minimum income below which no one can fall. A Living Income would mean that everyone in the UK can afford to put food on the table, cover their bills and provide for their family.

Image: iStock

If you back a recovery plan based around great public services, protecting the planet and reducing inequality, please support NEF to build back better.


Make a monthly donation

£3 £5 £10 £25 £100
£

Make a one-off donation

£5 £10 £25 £50 £100
£

Leave a Reply

Your email address will not be published. Required fields are marked *