Yesterday’s warning from Ofgem that the energy price cap is expected to rise to by a further £800, to around £2800 in October, will come as a hammer blow to the many millions of people across the country who are already struggling to manage and meet the rising cost of living. The expected increase to the energy price cap will inevitably drag those living in poverty into a state of destitution while those living on the brink of poverty now risk being pulled into hardship for the first time.
New analysis by the Centre for Progressive Policy shows the devastating consequences this will have on low-income households in the UK. We estimate that the estimate announced yesterday means that fuel costs will account for more than a quarter (27%) of household income, after housing costs, for households in the bottom 20% of the income distribution. This is upwards of seven million people. Meanwhile fuel costs will account for over 10% of household incomes after housing costs for nearly 39 million people, who make up the majority (60%) of the population.
Source: CPP calculations based on HBAI 2020/21. Modelling of equivalized household income (after housing costs) is based on historical energy price caps, in addition to increase to £2800 expected by Ofgem in October.
Urgent and significant action is needed from the Chancellor if we are to have any chance of avoiding a horrifying poverty crisis this winter.
Given that the spike in energy prices is expected to be temporary, the Chancellor must use the benefits system to deliver targeted one-off support to cover the costs of the recent and upcoming increases in the energy price caps for low-income households. CPP estimates that the total cost of covering both energy price caps for households on Universal Credit and legacy benefits would be £6.2bn. In the long-term, the government should further strengthen social security to ensure that vulnerable people and places have greater resilience to absorb short-term economic shocks.
The Chancellor should also raise the income threshold criteria for the Warm Homes Discount. It is currently only available to households with an income lower than £16,190, but the expected new price cap will have profound implications for households who don’t fall below this bracket. The Treasury should also push ahead with potential plans to increase the current allowance of £150 to £600.
Finally, the government must focus its efforts on supporting local government to mitigate against the pressures of the cost of living through a significant expansion of the Household Support Fund. The current funding package of £500m has been woefully inadequate, with 1 in 6 councils having run out of their previous allowance early. Meanwhile, new requirements to allocate fixed proportions of local allowances to specific groups, such as children and pensioners, is significantly impeding local councils’ ability to respond efficiently to this crisis in a way that is accommodating of differing local circumstances. Funding must be scaled up significantly and these new requirements must be dropped immediately, enabling local areas to target those most in need rather than having to meet arbitrary thresholds set by central government.
Delivering targeted one-off support via the benefits system and making a significant expansion to the Warm Homes Discount will also support local authorities by reducing the rising service demand that many have seen in the absence of targeted interventions to date. As identified by our previous analysis, different areas experience different pressures which make their residents vulnerable to the impact of rising prices, so this will help local authorities to respond appropriately to their varying local contexts.