By Professor Donald Hirsch, Policy Adviser to the Trust
On April 1st, the government refocused support for living costs back onto the worst-off – those already receiving benefits such as Universal Credit, for which only the lowest-income households qualify. They will get £900 extra this year to help cover high fuel bills and other costs. This feels like a logical pulling back by the state from dispensing cash regardless of income, following the 18-month furlough scheme and then this winter’s 400 for every household to offset energy bills. Yet for someone on modest earnings fractionally too high to get Universal Credit, and facing gas and electricity bills over twice what they were two years ago, life has just got tougher.
New analysis from the Financial Fairness Trust focuses on a financial squeeze being felt by households significantly above the poverty line, but still just below the middle of the income distribution. By October 2022, twice as many of these households as a year earlier were in serious financial difficulties. This is not just a question of the comfortably-off having to rein in discretionary spending: one household in five on these income levels are falling behind with bills, and a similar number cutting back on the number of meals they eat. So some people with incomes closer to the middle than the bottom of the income distribution are sometimes unable to afford three meals a day. This is a pretty astounding indication of how widespread hardship has returned to twenty-first century Britain.
The issue of how much the state should help support the living standards of people who are not poor arises not just from the current living standards crisis, but also from long-term changes that have made their lives less secure, and often exposed them to greater risk. One factor, first described by Will Hutton in the 1990s, is that roughly a third of the working-age population, despite being in work, face insecurity in the labour market. And since the 90s, housing choices have become far tougher for middle-income households, with owner-occupation more elusive and private renting reducing security and raising the ratio of housing costs to income. Pensions security is also harder to attain with the demise of salary-based pensions, relying on people putting more of their earnings into pensions savings. With median incomes stagnating, these households are facing a severe financial squeeze, making it impossible to meet short-term spending pressures while providing prudently for insecure futures.
Public policy is not wholly neglecting these pressures. The Budget’s biggest social reform, the extension of free childcare hours to all preschool children over 9 months old, for anyone earning under £100,000 per year, will especially help parents in middle-income families (who cannot access the high childcare subsidy in Universal Credit) to return to work. Promised reforms to private renting, making it harder for landlords to squeeze higher rents out of existing tenants, could be enacted this year; stronger employment protection laws, also long promised, may take longer. These are ways of improving financial security for middle income families without the state simply giving them money.
But other policies are pushing in the opposite direction. A notable recent example is a sharp increase in the amounts many university graduates will be charged to repay student loans, both by reducing the level of earnings threshold for repayment and by extending the period before this debt gets written off. Those with the lowest earnings, or not working, will still pay nothing; those with high earnings will pay off their loans relatively fast. It is middle earners who are hit hardest.
In the past, governments broadly relied on the escalator of steadily rising earnings and hence household incomes to improve living standards for the non-poor. Median incomes rose on average 2.5% a year in the 1980s and 1990s, but this slowed to 1.5% in the 2000s, 1% in the 2010s, and zero forecast for most of the 2020s. While they cannot simply boost middle incomes through redistribution, governments should at least be thinking more systematically about what policies might reduce insecurities for this group, and what policies to avoid because it makes them worse off.