Families will be over £3000 out of pocket by April 2023 without further govt intervention

Families are set to see their average annual spending rise by £3,100 more than incomes between April 2021 and April 2023 without further government intervention, according to new research published by the New Economics Foundation (NEF) today. The new modelling shows that poorest households will see their households’ finances down 10% compared to 2021. Even if existing government support were to be extended beyond April 2023, families would still be out of pocket by £2,400 on average.

Families are struggling with rising prices due to the increased cost on direct energy consumption, such as heating and lighting a home and through indirect costs as companies facing high energy bills mark up their prices to cope. From April 2023, NEF recommends a new package of support for at least two years, including a new free energy entitlement for all families, a new £750 universal payment and a £1,000 boost to means tested benefits. Combined, these measures would fully reverse the average squeeze in the cost of living since April 2021 for the lowest income 50% of the population.

The annualised price cap for a typical family paying by direct debit nearly doubled from a little over £1,000 to just under £2,000 between April 2021 and April 2022. By October 2023 the cap will have risen to over £3,500, and the latest forecast estimates a further rise to more than £6,600 by April 2023, with the cap remaining at around £5,900 for the remainder of 2023. By next Spring, a typical family will be paying 500% more for domestic energy consumption than they were before the pandemic.

The government’s support package first announced in February 2022 and enhanced in May 2022 consisted of a council tax rebate, energy bill rebate, a one-off top up for those on means-tested benefits and a payment to those receiving disability support. At the time, this package broadly offset the expected increase in direct household energy price inflation between April and October 2022 for the poorest families but did not protect against the rise prior to April, nor the larger indirect price rises due to energy elsewhere in the economy.

Government support has once again been overtaken by events. Even if it were to be extended beyond April 2023, families would still see their average annual spending rise by £2,400 more than incomes between April 2021 and April 2023. This is even after taking account of forecasts for wage growth and higher benefits by April 2023. For the lowest income families, the deficit between spending and income growth would be worth 8% of disposable income.

Freezing the energy price cap at 2021 levels makes sense over the next 6 months as an emergency measure. But at well over £100bn a year from April 2023 it is extremely expensive to extend, and by artificially reducing the price of energy for everyone it also makes efforts to tackle climate change and energy security even harder.

NEF recommends a new ​‘cost of living support package’ to begin in April 2023. The support would boost incomes for 80% of families on average, and for the lowest income 50% of families it would fully reverse the average amount that spending growth has exceeded income growth since April 2021. This package would be made up of:

1. A new system of ​‘universal basic energy’ to replace the energy price cap system: Every family would be entitled to a level of free energy consumption, but would pay a premium for all energy above this level. The lowest income families would see their bill fall by £4,400 compared to the current forecast, while families on average income would see their bill fall by around £1,000. The richest 10% of families would see their bill rise by less than 4% of household income.
   
   
2. A new ​‘energy element’ in Universal Credit and legacy benefits worth £1,000 per year for a single person and £1,650 for a couple, to help the poorest families meet the costs of their energy bills above the new free entitlement: The cost of this payment would be £21 billion over 12 months, and it would be fully funded by reforming the government’s windfall tax on oil and gas profits, raising £22.6 billion over 12 months. The payment would also enable the creation of a new system for paying all families quickly in the UK in the event of future economic crises.
   
   
3. A new a new ​‘cost of living allowance’ paid to all families and worth £750 in the first year from April 2023 to help meet wider increases in prices beyond household energy use. While the universal credit IT systems are being updated, the payment could be added as a top-up to the main payment in universal credit and all legacy benefits. The total cost would be £10.6 billion over 12 months and this would be paid for by taxing income from capital gains at the same rate as earnings from employment, previously estimated to raise around £12 billion a year.
   

NEF’s recommended support package would boost net incomes on average for everyone outside the 20% highest income families. Families among the lowest 10% of incomes, £24,000 a year on average including benefits, would receive the equivalent of £6,200 in annualised support from new cash payment and reduced energy bills. Families on average incomes, £54,000 a year pre-tax, would receive the equivalent of around £2,300 in support.

For families in the lowest income 50% NEF’s recommendations would more than offset the rise in spending over and above income growth since April 2021. The highest income 20% of families would make a net contribution towards paying for this support through the higher cost of energy usage above their free amount. On average the richest 10% of families – with pre-tax household incomes of around £212,000 on average – would make a net contribution of less than 4%. The next 10% of high-income families – with pre-tax income of around £88,000 on average – would contribute just over 1% of income. Alternatively, these families could find ways to reduce their energy use.

Alfie Stirling, Director of Research and Chief Economist at the New Economics Foundation, said:

“The UK is currently facing an unprecedented crisis with the number of people struggling to make ends meet rising by millions this winter. But things are set to get even worse by spring, and stay that way for at least a year after.

“The government’s response so far has been too little, too late, overly complicated and poorly targeted. An emergency freeze in the price cap is needed now to buy time, but it is not viable for more than a few months.

“We need a sustainable solution that combines lower energy bills, incentives and support to increase energy efficiency and a permanently stronger income safety net. NEF’s proposed package of support meets this need: free basic energy for all paid for by higher energy prices for those that use more; a permanent new energy element in universal credit; and a new means of paying all families in the UK quickly in times of crisis.”

Dominic Caddick, Assistant Researcher at the New Economics Foundation, said:

“The anticipated rise in energy prices will have a catastrophic effect on household finances if the government does not step in to take action. The average person will see their costs go up by over £3000 their income since April 2021. This gap will force even middle-income families to make harsh decisions between heating and eating.

NEF’s solution would revolutionise the energy market, turning energy into a universal basic right so no one goes cold in the winter. Furthermore, boosting incomes with a £750 universal payment and a £1000 uplift to universal credit will further ease the pain of high prices elsewhere in the economy.”

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Notes to editors

The analysis, Warm homes, cool planet: A package to fix the UK’s energy price crisis, can be found at here.

NEF’s national energy support package would be more effective than an extension of existing government support, and more progressive and cost-effective than an extended freeze in the price cap (£)

NEF’s national energy support package would boost incomes for 80% of families

Universal basic energy
The ​‘free basic energy’ proposal would see all households outside the top 10% of incomes receive more than half of their energy free of charge on average. Most families would also see their cost of energy fall well below that implied by the April 2023 price cap, with the largest average benefit for families in the lowest income deciles.

For illustrative purposes NEF modelled the effects of a system that sees the first 8,000 kilowatt hours of gas and 2,000 kilowatt hours of electricity free of charge, irrespective of tariff. This would ensure that on average the poorest 10% of households would receive just under 90% of their energy consumption for free. Above this, the unit cost of both gas and electricity consumption are set at a rate just under three times higher than their respective forecast direct debit price cap for April 2023, at 87p and £2.61 per kilowatt hour respectively.

This illustrative system would also include a temporary subsidy to energy retailers of around £14.6bn per year from April 2023 onwards, less than 13% of the cost of freezing the price cap at April 2022 levels. We propose that the government need not announce new tax rises to meet this temporary cost during elevated energy prices, just as the government did not announce new taxes to pay for the majority of their package of support earlier this year. This means extra temporary spending from the government would be met through higher borrowing, which is the most efficient and cost-effective way of spreading the cost of a temporary crisis across time and would dampen the effects of the coming recession. Once energy prices come down, the amount of free energy available to families could also be reduced to ensure the whole system was fiscally neutral. The government could also recoup the costs of this additional borrowing through a long-term profit cap on energy suppliers.

A new energy element for means-tested benefits
NEF proposes that a new payment in universal credit, and an equivalent top-up to legacy benefits, to help the poorest households cover the remaining cost of energy. The cost of this new payment would be £10.6bn a year from April 2023. NEF propose it is paid for on a permanent basis by equalising the rate of tax on capital gains with income tax by removing additional allowances and increasing the headline rate, which has previously been estimated to bring in around £12bn a year.

A new ​‘cost of living allowance’
The new system would establish the first means for the government to pay cash support to all households in the country, which could be used as a powerful means of welfare support in future. National insurance numbers would also allow the government to link households with their HMRC data, giving the option to target future payments by household income if needed (outside of means-tested benefits, the government can currently only target support by individual income, which could lead to over-supporting or under-supporting at the household level).

The £750 payment would cost £21bn per year and would be fully funded from the additional revenue generated by the government’s energy profits levy, following two reforms previously recommended by NEF:

• Increase the headline rate of tax on oil and gas profits from 65% to 85%, the rate required to return the sector’s post-tax profits to their pre-pandemic norm.
• Abolish the 91% tax relief on oil and gas extraction.
  

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