Cost-of-living pressures aren’t easing

Sarah’s story

We recently launched the National Red Index — a new way of understanding living standards. We’ve used the unique data we get from the people we help at Citizens Advice, to estimate how many people across the country are in a negative budget — where their essential costs are higher than their income.

This way of looking at living standards is tied to people’s lived experiences. It’s based on the real choices people make to stay afloat, and what they choose to prioritise when things get tough. It’s not an aspiration, or a minimum bar that we want to hold people above — it’s just the reality.

And that reality is pretty staggering. Nearly 5 million people are in a negative budget, stuck in the red, building up debt to get by. A further 2.35 million are living on empty — only escaping a negative budget by cutting their essential spending back to unsafe levels just to keep their heads above water.

When looking at such huge numbers, it can be easy to forget the individual people behind each one. So what if we zoomed in and looked at just one person who came to us for help with debt in the last year: Sarah.

Sarah’s story

Sarah is a single parent living with her young child in a flat she rents from a private landlord. She works full time on minimum wage and receives Universal Credit to top up her income. But it isn’t enough.

During a debt assessment, our advisers go through a person’s income and outgoings, to see whether they can afford to pay back their debt. In Sarah’s case, there was nothing to cut back. In fact, she already spends less on food and communications (like a phone and internet) than we would expect. Despite this, her essential costs are higher than her income. Every month she’s £56 in the red.

One problem has been rising prices. Sarah faces high costs for utilities, car insurance and petrol. She needs her car to get to work, but her income hasn’t kept up.

Another problem is housing costs. Sarah pays £800 in rent each month, and while she’s entitled to support for this through Universal Credit, the amount she gets is capped through her Local Housing Allowance rate. As a result, less than 3/4 of her rent is covered, so she’s having to find that money elsewhere in her budget every month. Our advisers helped her apply for council housing, which would be more affordable. But we know there are long waiting lists, and it might take years for her to be offered a home.

Because Sarah is already working full time, there’s nothing she can do to get herself out of the red. She has built up debt to try and cover everything, but this just adds to the burden. And things only get worse each month. Even without factoring in interest, Sarah is building up £672 new debt each year just by buying the essentials. This puts her in an incredibly difficult situation and means she’s at risk of falling behind on bills — which can have serious consequences, such as being evicted.

Turning the tide on negative budgets

So, what would make the difference for Sarah, and people like her? In our report, we identified 4 key drivers of negative budgets:

1. Income from benefits hasn’t kept pace with the true cost of living
2. Work isn’t paying enough
3. Consistently high housing costs
4. Spiking energy costs

If we could shift the dial on these issues, what impact would that have for Sarah? We highlight 5 changes which could have a sizeable impact:

1. Legislate to uprate working-age benefits using inflation data from the Household Costs Indices, so they better reflect the true cost of living for low-income households
2. Keep increasing the national minimum wage so more people in work can be lifted out of a negative budget
3. Improve energy bill support by expanding eligibility for the Warm Home Discount and increasing support for those with the greatest energy needs
4. Ensure affordable access to essential markets through social tariffs for water, broadband and motor insurance
5. Reform the Local Housing Allowance so it better supports people with high private rent costs

We applied these policy proposals to Sarah’s budget, and the results are impressive.

Through increases to her benefit payments, the minimum wage, and her Local Housing Allowance, Sarah would see an increase in income of about £218. And if she were eligible for social tariffs and an increased Warm Home Discount, her expenditure would reduce by nearly £180.

All together, these changes would be worth nearly £400, leaving her with a monthly remainder of £340. This could make a huge difference to Sarah — she’d stop accumulating debt and could think about spending a bit more on food, which she’d been cutting back on significantly.

Sarah would still be left with some tough choices — we know that all of her costs will increase alongside inflation, likely reducing her monthly surplus to about £210. But these policy changes put her in a much better position. Most importantly, she has options to improve her and her child’s living standards — by cutting back less on essential costs, preparing for inflation increases, and paying down debts — without going into the red anymore.

Scaling up

These policy options wouldn’t just help Sarah. We estimate that they would lift 1.1 million people out of a negative budget, cutting the overall negative budget rate by a quarter, and bringing it to the lowest rate since the cost of living crisis began.

These changes should be seen as a first step to alleviate some of the pressure on negative budgets, which could be implemented in the first 100 days of a new government. They wouldn’t completely reverse the problems we’ve seen, but Sarah’s story shows how government action is essential for tackling the root causes of problems and making genuine progress towards changes for the long term.

As we look ahead to a likely general election this year, the squeeze on household budgets will be a defining issue for voters. Looking at living standards through a negative budget lens not only shows us what’s driving the problem, but also the action the next government could take to start fixing it.