Rising energy prices have led to a ‘comfort crunch’ as families spend more of their budgets on essentials

Rising energy prices over the last two decades have squeezed incomes for low-and-middle income families and contributed to a ‘comfort crunch’ as more of their budgets are spent on household essentials, according to new Resolution Foundation research published today (Monday).

The Bare Necessities – the fourth report of the Foundation’s Unsung Britain project, with support from JPMorganChase – examines how the cost of household essentials has changed since the early 2000s, and how that has affected the living standards growth of low, middle and high-income families.

The report notes that non-housing essentials – food and drink, utility bills, clothing and footwear, childcare, and road, rail and buses – are collectively taking up a larger share of family budgets today compared to two decades ago, and particularly so for lower income households.

Across the poorest half of working-age households in Britain, these essentials now take up 49 per cent of total non-housing budgets, up from 42 per cent in 2002. Among richer households, the increase has been more muted – up from 37 to 41 per cent.

The share of family budgets spent on essentials has risen in recent decades despite successes in curbing the cost of many of these items. Food and drink in Britain is 11 per cent cheaper than the OECD average, the cost of clothes and shoes has fallen by 37 per cent in real terms since before the financial crisis, and fuel is cheaper in real terms today than it was back in 2002 – at the cost of £23 billion a year in foregone fuel duty revenues.

The crucial exception to the long-term fall in the cost of essentials, however, has been energy prices. The cost of gas and electricity doubled in real terms between 2000 and 2019. It then rose by a further 71 per cent – resulting in average annual bills rising from £1,200 to £2,051 despite families cutting back on energy use – between 2019 and their peak in 2023, before falling slightly in recent years. Energy costs are still around 150 per cent higher in real terms today than in 2000.

Poorer families’ exposure to spiralling energy bills in recent years has left a legacy of energy debt more than doubling in real terms, from £1.6 billion in late 2019 to £3.9 billion in late 2024.

This should prompt policymakers to rethink household support, say the authors, particularly since energy bills account for a far bigger chunk of lower-income households’ spending (11 per cent in 2022-23, the latest year of spending data) than other utilities such as water (2.1 per cent).

The report calls for a new social tariff – using government data to assess households’ ability to pay bills and energy companies’ data to assess customers energy use – to support families who are struggling with energy bills, with discounts on the unit prices of gas and electricity.

The authors suggest that a low-cost, taxpayer-funded, social tariff could be established to operate in normal times. For example, a 10 per cent social tariff discount applied to the poorest two-fifths of households in England and Wales would cost £1.6 billion – the same as the expected cost of Winter Fuel Payments this year after the Government’s recent reversal – but better targeted at those who need help the most.

The tariff could then be ramped up in the event of a new energy price shock. This would be far more cost-effective than the universal energy bill reductions given out during the last cost of living crisis, which cost £37 billion in total.

Lalitha Try, Economist at the Resolution Foundation, said:

“The poorest half of working-age families across Britain are now spending half of their budgets outside of housing on essentials like food, petrol, utility bills and clothing. This has created a ‘comfort crunch’ as families have less left over for the more fun things in life like eating out, leisure activities and holidays.

“This ‘comfort crunch’ has happened despite the cost of some essentials being kept low. Food in Britain is still cheap by international standards, and the cost of clothing has fallen by a third.

“The big exception has been energy costs, which rose gradually during the 2000s and 2010s and then much more quickly during the cost of living crisis.

“Ministers can better protect households from these energy price pressures by providing a discount for those on low incomes that goes beyond those on means-tested benefits. Such a scheme needn’t cost much in normal times, but could be ramped up if another energy price shock comes around.”