Poverty and the cost of living

This report looks at how the relationship between poverty and the cost of living differs between types of goods, markets and population groups, and considers the policy options.

Key points

• Essential goods and services to meet basic needs and participate in society take up a relatively larger share of low-income budgets

• The price of essential goods and services has risen relatively quickly in recent years, meaning the cost of living has risen faster for those on low incomes. Some groups – such as disabled people and those living in rural areas – have specific or enhanced costs of living as a result of additional costs, higher prices, or higher quantities.
• Low-income individuals are less likely to be ‘active consumers’ switching suppliers and shopping around, partly due to a lack of access to ‘enabling goods’ that give consumers advantages, e.g. a bank account or internet access.

• Public policy has a direct influence on the cost of living, for example through the level of indirect taxes such as VAT, direct price regulation and through stewardship of competition in the market.
• Essential costs may be reduced or compensated for by, for example, discounts for targeted energy customers, the universal service obligation in the telecoms sector or money to offset some costs (such as housing and childcare).
• Regulators are increasingly using the concept of ‘consumer vulnerability’ – a more dynamic and flexible concept than that of ‘disadvantaged groups’. However, there are concerns over how it can be used in practice, and how poverty and low income fit into this framework.
• Policy options can target the cost of living and its link to poverty – focusing on low-income households, high-cost households or the whole population but with particular benefits to either low-income or high-cost groups.

BACKGROUND

Most discussion of poverty centres on incomes and the policy solutions are assumed to lie with individuals and government. The cost of living is an important extension to this discussion, bringing in different markets and widening the group of actors to include companies and regulators.

How do low-income budgets differ?

The concept of essential goods and services, such as those set out in JRF’s Minimum Income Standard (MIS), is common across developed countries. In the UK, a higher proportion of expenditure by low-income households is on essential goods and services compared with better-off households. This results in a differing inflation rate. In recent years, those with low incomes have tended to experience a higher rate of inflation, although this was not the case in general between the 1970s and the 2000s.

There may also be a different relationship between costs and poverty among low-income households. For example, some groups face ‘special’ and enhanced costs. Special costs are those that other groups do not face; enhanced costs are costs that other people have, but not to such a large degree. For example, a disabled person with restricted mobility faces special costs of home adaptations, and enhanced costs of heating a home they spend more time in. Those in rural areas have special costs to some extent in the form of higher transport needs and may have enhanced costs, for example through higher heating bills.

The poverty premium

The poverty premium is the idea that ‘the poor pay more’. This may include, for example, paying for energy through more expensive prepayment meters, which are used mainly by low-income households; paying more due to a lack of banking facilities for direct debit payments; paying more in fixed costs due to low consumption.

This poverty premium does not only affect those in poverty, nor is its effect consistent. For example, people in poverty are more likely to live in deprived areas, where home contents insurance premiums are higher, but most people in poverty do not live in such areas, and most people living in those areas are not in poverty. The poverty premium often relates to a higher chance of paying a higher price, often associated with something related to poverty but not necessarily poverty itself. Being in poverty may also mean lacking the resources to get around the problem – for example, the ability to afford transport to a supermarket rather than relying on higher-cost local shops.

Despite numerous examples of a poverty premium, it is difficult to quantify. There have been no estimates of an ‘average’ effect or the numbers of households that might be affected.

Public policy and the cost of living

Almost all economic decisions made by government and business have the potential to affect people’s cost of living. For example, trade policies can raise or lower the price of imported goods. Planning policies can raise or lower the cost of land, and so the cost of housing.

This research identifies the policy decisions made by government or public bodies that have a direct and immediate influence on the cost of some essential items. This takes various forms including: housing benefits; restrictions on the uprating of water and rail charges; and stewardship of the market to ensure competition (see Table 1).

Government intervention can increase as well as reduce the cost of essentials. There is some debate in the literature over whether indirect taxes, such as VAT and excise duties, weigh more heavily on low-income households. These policies do not apply exclusively to people in poverty, and indirect taxation represents a smaller share of the minimum socially acceptable budget than of average expenditure – partly because some key goods like food and energy are subject to either no, or reduced, VAT. Moreover, the costs of some key essentials, such as food and energy, are influenced by global market factors as well as domestic policy.