Memorandum submitted by Resolution Foundation
(FP 38)
The Resolution Foundation is an independent
research and policy organisation. Our goal is to improve outcomes
for low earners by delivering change in areas where this income
group is currently disadvantaged. We do this by:
— undertaking research and economic analysis
to understand the challenges facing low earners;
— developing practical and effective policy
proposals; and
— engaging with policy makers and stakeholders
to influence decision-making and bring about change.
SUMMARY
— Low earners are too rich to qualify for
any state assistance with energy costs yet often too poor to comfortably
meet rising fuel costs or make their homes energy efficient.
— Low earners independence from benefits
also means they are largely unable to obtain grants such as Warmfront
for improving the energy efficiency of their homes.
— The significant numbers of low earners'
living in private rental properties means they are likely to live
in energy inefficient properties, thus increasing their potential
fuel costs.
— Essential items such as housing, fuel
and power and food & non-alcoholic drinks, on which
households are likely to have little room for manoeuvre, accounts
for around 41% of low earner disposable household income on average,
compared with 27% among high earner households.
— In 2009, low earner households spent
on average 100% of their weekly disposable income leaving little
room for rising fuel bills.
— Increases in the global price of oil
pushed domestic fuel costs to a peak in the latter part of 2008.
Typical domestic gas bills for 2008-09 were around 10% up
on the previous year in real terms and typical electricity bills
increased by around 22% over the same period. Although fuel prices
fell slightly during 2009, they remain high by historical standards.
INTRODUCTION
1. "Low earners" is the term the
Foundation uses for the group of people who are "too rich"
to qualify for state support yet often "too poor" to
access the benefits of private markets. At its simplest, we consider
the group to be made up of households in income deciles 3, 4 and
5: that is, with gross annual income between £11,650 and
£27,150.120 Around 7.2 million households fall
into this category in the UK, equivalent to around 14.0 million
adults.
2. The Foundation has found that low earners
face distinct challenges across a range of areas because they
are:
— squeezed by the mixed economy;
— particularly exposed in the current economic
context; and
— at risk of being overlooked by policy
makers.
3. The Resolution Foundation is therefore
pleased to respond to this important and timely inquiry and given
our area of expertise our submission will focus on:
— The definition of households in fuel
poverty commonly used—ie those households where more than
10% of income has to be spent on fuel for adequate heating.
We will make the case that more attention needs
to be given to low earners with respect to fuel poverty.
4. Low earners are often too poor to meet
rising fuel costs without difficulty or to invest in insulation,
but too rich to qualify for assistance with bills or help with
energy saving measures because they are not in official fuel poverty
or they are not on benefits and therefore don't qualify for help
such as Warmfront.
5. Low earners spend a higher proportion
of their monthly income on essential expenditure such as food
and fuel than higher earners. They also spend 100% of their monthly
income leaving them little room to save for a rainy day—or
in this case a cold spell. They also lack the safety nets of insurance
and savings that higher earners may enjoy. Similarly they do not
receive much help from third sector organisations who rightly
focus their attention on the very poorest. This does however leave
low earners in a vulnerable position—just over eligibility
thresholds for any free help yet with relatively low incomes fuel
costs can become a real burden.
6. Low earners are similarly squeezed in
the housing sector too rich to be a priority for social housing
yet often lacking the deposit needed to get on the housing ladder.
They therefore often find themselves at the sharp end of the private
rental sector in energy inefficient homes. Even low earning homeowners,
because of their low income, will struggle to make their homes
energy efficient.
7. Above inflation rises in fuel costs in
recent years and the particularly cold winter we are experiencing
mean that fuel costs can become a real burden for a low-income
household.
8. Despite falling back somewhat in 2009 due
to subdued global demand, oil prices are expected to settle at
a level significantly higher than experienced during the preceding
decade. Given the need for additional investment in power supply
and carbon reduction, Ofgem has warned that domestic energy prices
in the UK will continue to rise with an increasing number of consumers
unable to afford adequate levels of gas and electricity.[123]
LOW EARNERS
AND FUEL
COSTS
9. Table 1 shows that, while low earners
spend less of their total household income and disposable household
income than the benefit-dependent group on fuel costs, the proportions
are still considerable and significantly higher than among higher
earners.
Table 1
WEEKLY HOUSEHOLD EXPENDITURE BY INCOME GROUP
OF HOUSEHOLD: UK 20081
| |
| | | |
|
Averages
| As proportion of total expenditure
| | As proportion of disposable household income
|
| Benefit-
dependent
| Low
earners | Higher
earners
| Benefit-
dependent | Low
earners
| Higher
earners |
| |
| | | |
|
| Housing(net),2 fuel & power | 19%
| 15% | 9% | 22%
| 15% | 8% |
| Food & non-alcoholic drinks | 17%
| 14% | 9% | 20%
| 14% | 8% |
| Recreation & culture | 11%
| 13% | 13% | 13%
| 13% | 11% |
| Transport | 9% | 12%
| 15% | 11% | 12%
| 12% |
| Miscellaneous goods & services | 7%
| 7% | 8% | 8% |
7% | 6% |
| Restaurants & hotels | 7%
| 7% | 8% | 8% |
7% | 7% |
| Household goods & services | 7%
| 6% | 6% | 9% |
6% | 5% |
| Clothing & footwear | 5% |
4% | 5% | 6% | 4%
| 4% |
| Communication | 3% | 3%
| 2% | 4% | 3% |
2% |
| Alcoholic drinks, tobacco & narcotics |
4% | 3% | 2% | 4%
| 3% | 2% |
| Health | 1% | 1%
| 1% | 1% | 1% |
1% |
| Education | 1% | 1%
| 2% | 1% | 1% |
1% |
| All expenditure groups | 91% |
86% | 80% | 107% |
86% | 67% |
| Other expenditure items3 | 9%
| 14% | 20% | 11%
| 14% | 17% |
| Total expenditure | 100% |
100% | 100% | 118%
| 100% | 84% |
| |
| | | |
|
| Notes: | |
| | | |
|
1 Based on weighted data and including children's expenditure.
| | | |
| | |
2 Excluding mortgage interest payments, council tax and Northern Ireland rates.
| | | |
| | |
3 Including mortgage interest payments and council tax.
| | | |
| | |
Income groups defined on basis of deciles ranked by equivalised disposable income. Unlike Table 11, no further categorisation is made on the basis of the proportion of income received from income-related benefits (see Appendix 3).
| | | |
| | |
Average expenditure within each income group is derived by dividing gross spending recorded in Family Spending for the appropriate income deciles by the relevant numbers of households. Average disposable household income in each income group is derived by dividing gross disposable income recorded in The effects of taxes and benefits on household income for the appropriate income deciles and dividing by the relevant numbers of households.
| | | |
| | |
| Sources: | |
| | | |
|
ONS, Family Spending: A report on the 2008 Living Costs and Food Survey, 14 January 2010, Table 3.2E
| | | |
| | |
ONS, The effects of taxes and benefits on household income, 2007-08, 29 July 2009, Table 14
| | | |
| | |
| |
| | | |
|
10. Table 2 details weekly spending by each of the
three income groups on household and transport fuel. It shows
that, in 2008, low earners on average spent a higher proportion
of both their total weekly expenditure and their total weekly
disposable income on fuel than high earners, making it harder
for them to meet increased costs associated with fuel price rises.
Domestic fuel expenditure accounted for around 6% of total disposable
income in low earner households, compared with 3% in the higher
earner group.
Table 2
WEEKLY HOUSEHOLD EXPENDITURE ON FUEL BY INCOME GROUP OF
HOUSEHOLD: UK 20081
| As proportion of total expenditure
| | As proportion of disposable household income
|
| Benefit-
dependent
| Low
earners | Higher
earners
| Benefit-
dependent | Low
earners
| Higher
earners |
Household fuel | 7.8% |
4.5% | 3.7% | 9.2%
| 5.7% | 3.2% |
| Transport fuel | 2.7% | 4.6%
| 4.6% | 3.2% | 5.8%
| 3.9% |
| Total | 10.5% |
9.1% | 8.2% | 12.5%
| 11.5% | 7.1% |
| | |
| | |
|
| Notes: | |
| | | |
|
1 Based on weighted data and including children's expenditure.
| | | |
| | |
Disposable income of each income group defined on basis of deciles ranked by unadjusted disposable income. Expenditure of each income group defined on basis of deciles ranked by unadjusted gross income. Averge expenditure within each income group is derived by dividing gross spending recorded in Family Spending for the appropriate income deciles by the relevant numbers of households. Average disposable household income in each income group is derived by dividing gross disposable income recorded in The effects of taxes and benefits on household income for the appropriate income deciles and dividing by the relevant numbers of households.
| | | |
| | |
| Sources: | |
| | | |
|
ONS, Family Spending: A report on the 2008 Living Costs and Food Survey, 14 January 2010, Table A.8
| | | |
| | |
ONS, The effects of taxes and benefits on household income, 2007-08, 29 July 2009, Table 24
| | | |
| | |
| | |
| | |
|
11. Table 4 shows how many low earners struggle
with fuel costs. While the numbers are less in percentage terms
to the benefit-dependent group they are still considerable when
you translate these into actual numbers. Approximately 210,000 adults
are behind with electricity bills and approximately 190,000 adults
are behind with gas bills.
Table 4
BENEFIT UNITS BEHIND WITH HOUSEHOLD BILLS BY INCOME GROUP:
UK 2007-08
| Benefit-
dependent
| Low
earners | Higher
earners
| All
benefit units |
Council tax | 5.4% |
4.1% | 1.6% | 3.3%
|
| Electricity bill | 5.5% |
2.1% | 1.0% | 2.5%
|
| Water rates/Rates (NI) | 6.1%
| 1.9% | 0.8% | 2.6%
|
| Gas bill | 4.9% | 1.8%
| 0.8% | 2.2% |
| Telephone bill | 3.4% | 1.5%
| 0.5% | 1.6% |
| Television/video rental or HP | 1.2%
| 0.3% | 0.1% | 0.5%
|
| Insurance policies | 0.3% |
0.1% | 0.1% | 0.1%
|
| Other HP payments | 1.9% |
0.8% | 0.4% | 0.9%
|
| Other fuel bills | 0.5% |
0.2% | 0.1% | 0.2%
|
Notes: | |
| | |
Income groups based on gross benefit unit income equivalised for unit size and composition. Benefit units in receipt of income-related benefits worth 20% or more of their total income are considered benefit-dependent (see Appendix 3).
| | | |
|
| Source: | |
| | |
DWP, Family Resources Survey 2007-08
| | | |
|
| |
| | |
12. However, despite being less able to cope with fuel
price rises than higher earners, low earner households are unlikely
to qualify for any form of assistance. Social tariffs provided
by energy companies are targeted at the most vulnerable customers—those
in fuel poverty, those on benefits and older people. To be considered
in fuel poverty, a household must spend at least 10% of its income
on domestic fuel. Few low earners households are likely to meet
this criterion. However, their nevertheless vulnerable position
could be made worse by the fact that the costs associated with
social tariffs are likely to be met by energy suppliers' remaining
customers.
13. In addition, low earners are less able than benefit-dependent
households to reduce their domestic fuel consumption. Grants such
as Warm Front and Warm Deal which are designed to help households
make their homes more energy efficient are primarily available
to benefit recipients rather than low earners. A recent National
Audit Office (NAO) review of Warm Front concluded that:
Applicants are assessed on a "first come first served"
basis, with eligibility based on receipt of benefits used as a
proxy for those most likely to be in fuel poverty. Analysis of
the English House Condition Survey 2006 indicates that 57%
of vulnerable households in fuel poverty do not claim the relevant
benefits to qualify for the Scheme. Yet nearly 75% of households
who would qualify were not necessarily in fuel poverty. [124]
14. At the same time, low earners are more likely than
benefit-dependent and high earner households to live in energy
inefficient homes because of their higher concentration in privately
rented accommodation. Chart 1 details the distribution of
the housing stock by energy efficiency rating (EER) band, where
bands A & B represent the most efficient properties. It shows
that around 71% of RSL homes were categorised in Bands C &
D in 2007, compared with around 39% of private rented homes. By
contrast, around 7% of RSL properties were rated as Bands F &
G, compared with around 25% of privately rented homes.
Chart 1
Source: DCLG, English House Condition Survey 2007:
Headline Report, Table 9
CONCLUSION
15. Low earners are by no means in dire fuel poverty,
however, their life on the cliff-edge, just independent of state
support yet living on relatively low incomes, makes their fuel
costs a real burden and more needs to be done to recognise their
vulnerable position. Low earners' fragile economic position also
means that any unexpected expenditure or life event can make them
vulnerable to falling into benefit dependency. More needs to be
done across the board to enable low earners to stay financially
independent and a recognition of their position with regards to
fuel costs is part of the step towards this.
16. We suggest further examination of the following:
— more help for low earners struggling in energy inefficient
homes:
(a) in the private rental sector this could be in the
form of incentives/obligations for landlords;
(b) for low earning homeowners some form of matched funding
from the government might prove a helpful route; and
(c) an extension of Warmfront type schemes to non-benefit
recipients
— In our recent report, Closer to Crisis, we
also recommended that utility companies show forbearance to low
income households. For a low earner this flexibility during the
economic downturn will prove as important as forbearance by lenders.
17. If more steps are not taken to help low earners,
growing numbers will find themselves in fuel poverty (and therefore
cost more by way of help with fuel costs) in the coming years.
"It costs as much to run any house for one person
as it does for two. The gas, the electric is the same, the water,
I mean the household bills are the same for one as they are for
two…It's very difficult, you know I've got to budget very,
very carefully now… As you get older, there are certain things
you have to increase on, heating is one thing. Thousands of people
like me have arthritis and you daren't be in a cold house."
Margaret, 88, a low income householder in Surrey
February 2010
123
Ofgem press release, "Action needed to ensure Britain's energy
supplies remain secure", 3 February 2010 Back
124
NAO, The Warm Front Scheme, 4 February 2009 Back
|
