The cost of living crisis is disproportionately affecting poorer households. With fewer resources to cover rising bills, many are taking on debt just to get by. This has consequences in the short term, but also lengthens the effects of this crisis for the most vulnerable.
It has been a summer of deeply unwelcome records: the highest inflation in 40 years, the sharpest fall in pay for more than two decades and the hottest day ever recorded in the UK.
Like the Covid-19 pandemic, these are challenges that affect the whole country but not in the same way or to the same degree. A common thread is that they each affect individuals and households on low incomes far worse than those with more money.
As the temperature soared in July, the BBC released new analysis showing that people in deprived areas were disproportionately living in places far hotter than nearby, less deprived neighbourhoods.
The impact of this was exacerbated by pre-existing health inequalities, meaning that those on low incomes were more likely to have conditions that are aggravated by heat. They also tend to live in poor quality housing and lack the cash to spend on things that can help with the heat – such as a fan or an ice lolly.
Similarly, the high inflation driving the cost of living crisis is a global phenomenon, but the degree of exposure to it in the UK has been increased by policy choices. Before the pandemic, there were sharp rises in the numbers of people living in deep poverty (with incomes below 40% of median) and destitution (those with incomes so low they can’t afford the bare essentials such as food, shelter and clothing).
A decade of cuts and freezes to social security eroded support for people on low incomes, both in and out of work. Large numbers of workers were trapped in insecure, low-paid work with little chance of moving up to a better job. A dysfunctional housing market locked too many people into expensive, insecure, poor quality private rented housing. This is alongside a shortage of social housing and seemingly insurmountable barriers to ownership.
The economic impacts of the pandemic then fell most heavily on those who were already struggling. Many people on higher incomes were able to continue with well paid jobs, safely at home. Many were even able to build up savings as their leisure opportunities were curtailed by lockdowns and social restrictions.
By contrast, many on low incomes lost their jobs, saw their pay drop or were exposed to the higher risks of continuing with essential work in the community. Many also used up their savings and accrued debt trying to stay afloat.
The government’s decision to raise the rate of the main benefit – universal credit – gave significant protection to those receiving it during the pandemic. But the decision then to cut it again for those on the lowest incomes plunged many back into dire hardship. The universal credit cut imposed a drop in annual income of £1,000 for 5.5 million families – the biggest ever overnight cut to benefits.
As the cost of living crisis took hold, the ability of households to endure sharp price rises was therefore enormously unequal. The inflation rate they faced also varied.
Inflation has been driven up largely by the cost of essentials, particularly energy and food, on which poorer households spend far more of their budget than those on higher incomes. As overall inflation reached 9% in April, the effective inflation rate being experienced by those on the lowest income was already 10.9%, while those on the highest incomes faced a rate of only 7.9%.
The immediate impacts of this were evident in the numbers going without essentials such as food, heating or toiletries – seven million people, according to research carried out in May 2022 by the Joseph Rowntree Foundation (JRF).
There have also been spikes in the numbers turning to charities, such as food banks, to get by. The support package put in place by the government in May was very welcome, offering most low-income families additional support of about £1,200 (when added to previous announcements). This largely covered the rise in energy bills, but it is unlikely to be enough support for families facing many other cost rises and already in debt with average arrears of £1,600.
Going without daily essentials is, of course, appalling and can have long-term consequences for both physical and mental health. But the rise in debt and arrears, which has received less attention, is another deeply troubling consequence of the cost pressures bearing down on people.
Across the UK, 4.6 million people were already behind with bills in May, up a fifth compared with October 2021 (JRF, 2022). The average amount owed by low-income households in arrears was £1,600 and more than a million people were taking on debt just to cover essential bills.
Very worryingly, almost a fifth of low-income households were in debt to high-cost lenders including loan sharks, amounting to £3.5 billion in debt. Another £2.3 billion is owed to ‘buy now, pay later’ providers such as Klarna or Clearpay.
These debts will not disappear when inflation starts to fall and the economy returns to something closer to stability. The scope for many on low incomes either to save for future expenses or to pay off debt is severely constrained.
Debt and arrears also often have a significant impact on people’s mental health. Nearly half of people with problem debt also have a mental health problem and 40% say their finances have made their mental health problems worse, according to the Money and Mental Health Policy Institute. Financial difficulties also affect recovery rates, with people 4.2 times as likely still to suffer from depression after 18 months if they are in problem debt.
National crises and traumas always have long-lasting consequences that affect people across all income groups and parts of the country. But these are often disproportionately severe and long-lasting for those with fewer financial and other resources.
Children from low-income families experienced greater pandemic-related learning loss than those from better off areas. People in deprived areas are more likely to suffer from long Covid.
The current cost of living crisis is similarly likely to cast a deep shadow over people on low incomes, long after those who are better off feel that the sun has come out once again.
Where can I find out more?
- Not heating, eating or meeting bills: Managing a cost of living crisis on a low income: Report by the Joseph Rowntree Foundation.
- Going without: Deepening poverty in the UK: Report on the effects of deep poverty and forgoing essentials by the Joseph Rowntree Foundation.
- The facts – links between mental health and money problems: Money and Mental Health Institute.
Which organisations are experts on this question?
- Joseph Rowntree Foundation
- Citizens Advice
- Resolution Foundation