Five Million People Can't Afford Basic Outgoings In "Living Standards Catastrophe"
New research by Citizens Advice has revealed five million people are living in negative budgets in the UK. (Alamy)
Exclusive: New research by Citizens Advice has found that five million people are living in a negative budget, meaning the amount of money they have coming in does not meet the cost of basic outgoings such as accommodation, food and fuel.
The charity has accused politicians of "burying their heads in the sand" over the scale of the crisis.
The new research seen by PoliticsHome found the number of people living in negative budgets is up by more than 50 per cent compared to 2020, increasing from 3.25m at the start of 2020 to 5m currently. A further two million people are also cutting back on spending to "unsafe levels" to avoid falling into a negative budget - with the average household in that situation around £4,200 short of the cost for their essentials every year.
Researchers believe soaring housing costs and energy bills are key factors which are driving people into debt, with private renters in a negative budget spending 73 per cent of their income on housing and energy alone. Mortgage holders in a negative budget spend considerably less on the housing and energy bills, with 43 per cent of their income spent on energy and mortgage repayments.
The charity say without government intervention, 250 people each day will fall into a negative budget between now and the next election.
Ministers have hinted that there could be tax cuts in the next budget on 6 March, which Chancellor Jeremy Hunt and Prime Minister Rishi Sunak insist would prioritise working people. But Interim director of policy at Citizens Advice, Morgan Wild, felt that if these focussed around income tax or inheritance tax as is expected, it "won't have much of an impact at all for the people in these situations".
"Income tax, could in principle, reach some of these people – but most of the people we're looking at will be earning under the income tax threshold," Wild told PoliticsHome.
"We think a much more effective way of targeting results is to increase benefits, and to increase the minimum wage alongside – so you've got that combination of helping people who can't work and helping people who can work but currently aren't getting paid enough to make ends meet."
Wild said there were several measures the government should take to prevent the debt crisis facing households deepening, which the organisation believes could lift around a million people out of negative budget – including legislating to increase benefits by the rate of inflation experienced by poor households.
The real terms inflation faced by households on the lowest incomes is usually higher than CPI inflation because a greater proportion of their income is spent on items like energy or food, which are facing the steepest inflation.
According to the Office for National Statistics (ONS) food inflation, for example, was 8 per cent in the 12 months to December – double CPI inflation, which was 4 per cent.
"The Chancellor in November set out that he wanted to increase benefits by the rate of CPI inflation... the rate of inflation for poor households is much higher," Wild added. "He didn't succeed in increasing benefits in real terms, so it was still a significant cut to people's incomes."
Wild also said an increase in minimum wage would go a long way towards helping households struggling with growing debt.
"We've followed what the TUC and the Resolution Foundation have looked at for minimum wage, so we modelled an increase to 75 per cent of median earnings and that would lift around 110,000 households back into the black," they said.
Citizens Advice's other proposals include interventions to bring down housing costs and utility costs for people on low incomes which have risen steeply in recent years.
For example, Ofgem's energy price cap is currently set at £1,928 - significantly higher than before the energy crisis began in early 2022, when the price cap was £1,277.
Wild also said the government's decision to increase local housing allowance (LHA) to around the 30th percentile of rents in the autumn statement in November should be made permanent. LHA had been frozen since April 2020 despite rents increasing by a fifth on average in that period, according to the Resolution Foundation.
A government spokesperson said: “We are continuing to support families with the cost of living backed by £104 billion, while cutting taxes and curbing inflation so hard-working people have more money in their pockets - and there are 1.7 million fewer people living in absolute poverty, including 400,000 children, compared to 2010.
“Work is the best way to secure financial security which is why we are investing billions breaking down barriers to work and supporting low-income earners through our In Work Progression offer, helping them to increase their earnings and become financially independent. From April, we are also increasing the National Living Wage to £11.44 this year, boosting two million people’s pay by £1,800.”
PoliticsHome provides the most comprehensive coverage of UK politics anywhere on the web, offering high quality original reporting and analysis: Subscribe