The poverty premium – framing the debate, tackling the issue
21 July 2014
As we head towards the next general election, lifting living standards while building and sustaining growth are high on the political agenda. Since the financial crisis an extra dimension has emerged - fairness, as our work on good jobs also demonstrates. The toughest questions for today's governments are now not just how to achieve balanced growth that is financially, socially and environmentally sound - good growth - but equitable too, achieving a fair deal for all.
The economic upturn is not being felt in people’s pockets due to a real wage squeeze. And the spiralling cost of living is being felt particularly by those on low incomes. Indeed, the so-called ‘poverty premium’ can be a material issue for many of the most vulnerable households in the UK. This refers to situations when people not only have less money, but each pound also doesn’t stretch as far, for example, when those on the lowest income pay more than the better-off for basic daily necessities.
While the issue of the cost of living around energy and housing has attracted headlines, the poverty premium has evaded full examination or quantification. Against this backdrop, we recently convened the first in a series of discussions and action groups with representatives from industry, charities, campaign groups and government, to consider not only what the issues are but what can be done in practical terms to address them.
Indeed, the first discussion underlined how wide ranging and complex those issues are, grounded not just in economics but behaviour, access and education too. Raising the profile of understanding and action on the issues was recognised by all those taking part as a vital first step.
The lowest income households appear to be paying higher prices than the better-off for basic necessities like their utilities, telecoms and banking. For example, our recent UK Economic Outlook shows that the lowest income households in the UK are more exposed to higher average inflation rates over the past decade, due to the rising prices of food and energy, which represent a relatively large percentage of their budgets.
But some big questions about the poverty premium remain unanswered. Foremost among these is how big is it? Currently there is no official data or regular surveys targeted specifically at the prices faced by different income groups. It’s also difficult to measure the cumulative impact on households and individuals. Developing a systematic official set of statistics in this area, perhaps by extending an existing ONS or DWP household survey or establishing a new one, would be desirable, although clearly this will take some years to put into practice and would require additional resources.
Beyond measurement, during the session we learned that the reasons behind the poverty premium are many and varied. For instance, is there a lack of provider incentives? Low income households are often particularly hard hit, for example, where products are limited because payment methods are reliant on a strong credit history or liquidity. In these cases, market mechanisms don’t always deliver businesses sufficient incentive to design and promote products that are best suited to low income households.
Low income households also often consume in comparatively low quantities, meaning they cannot access volume discount deals. In addition, they can frequently face limited options in terms of how to buy products and services - if they do not have online access or are unable to pay via direct debit - which often offers better value price plans.
Lack of access to information about how households can best manage their own budgets was pinpointed as another key issue. This included the need to raise financial literacy ‘upstream’ as early as primary school, embedding consumer knowledge an early age, as shown by US experience.
Some attendees felt there is a role for government where resources and information are fragmented. Options discussed included using accredited intermediaries and personal advisors as well as accrediting providers of financial education. It was felt that further collaboration among those seeking to increase financial literacy would help everyone to access support before reaching crisis levels.
Behavioural economics, an area which has received relatively little attention and research in this space to date, may also provide a tool to understand better the choices of those on low incomes. The role of technology was also discussed in the context of how it supports access to information, or products, and drives pricing of particular products, but also the demographic issue of a digital divide between those using smart phones or computers and those that don’t. Data analytics and the role of technology is an area that again merits further analysis.
However, others questioned whether more or better coordinated information about managing household finance is really at the crux of the poverty premium. Very often rational and informed decisions are made by households on how to best spend and budget within difficult circumstances - and in the face of limited choices or options.
This pointed some within the group to the need for new products and services to cater for this consumer group - and, at the very least, greater visibility where the products and services exist but are not being taken up in large numbers, such as targeted bank accounts with direct debit facilities. For instance, in a recent PwC survey of consumers, 63% of those responsible for paying their energy bill who are unemployed have struggled to pay their bill, yet less than half (45%) feel they have any guidance on measures to support them in lowering their bills.
The role of government as a purchaser was also raised, prompting a discussion about whether consumer purchasing power can be aggregated, and collective bargaining used, to provide better access to the best deals. For instance, rather than individual households negotiating utility deals, can this be done more at neighbourhood estate level to achieve the economies of scale required for a better deal? An example is the Big Energy Switch initiative run by London councils.
The session concluded with the group considering how the profile of the poverty premium could be raised - similar to concern over the environment – from a niche to a mainstream issue at the heart of business strategy and government policy. A ‘kite-mark’ was proposed, similar to ‘Fairtrade’, so consumers on low incomes could identify whether they are getting a ‘fair deal’ at a glance, and be assured they were not paying more for their services and products.
It is clear that if awareness could be raised about the poverty premium across government, industry and consumers, the general principle that those on the lowest incomes should not pay more than others, would resonate broadly as a matter of fairness – and a matter for everyone.
We’ll be updating this blog on our discussions with industry, consumers and government on the poverty premium over the coming months. Register/contact for more information.