The bare necessities

In recent decades, the smallest disposable incomes have been particularly squeezed: in the 20 years from 2003-04 to 2023-24, non-pensioner incomes at the 10^th percentile only grew by a cumulative 0.5 per cent, compared to the (still meagre) 7.7 per cent growth at the 75^th percentile. While such sluggish and slanted growth is bad enough, it doesn’t tell the whole story, because the singular weight of essentials on poorer families adds yet another twist.

Poorer families have always had to devote relatively more of their resources to life’s essentials; social scientists have been grappling with the implications since Ernst Engel’s 1857 law relating the level of income to the share of it taken up by food. This much is perennial, but this rich-poor gap becomes pernicious when the cost of essentials soars, leaving those on lower incomes facing higher inflation than everyone else. This difference does not register in headline inflation measures which average across the population, such as the Consumer Prices Index (CPI). That means they are also missed in all the standard figures on absolute poverty and real incomes, which rely on such general indices. Fortunately, we can use the Living Costs and Food Survey to reckon with differences in families’ spending and the differential inflation this creates.

As our measure of disposable income already strips housing out, in defining ‘essentials’ we set this aside, and focus on: food and drink; household bills; clothing and footwear; essential transport; and childcare. Together, these represent 49 per cent of outlays of poorer working-age families, against just 41 per cent those in the top half. While this differential is expected, what’s striking is the way it has widened markedly over time: increasing from a 5 percentage point gap back in the early 2000s to 8 percentage points today. The differences are even more marked between the very top and very bottom. For the top fifth, the share of non-housing outlays devoted to essentials has barely budged, from 38 per cent in 2006 to 39 per cent in 2022-23. By contrast, for the bottom fifth, the same share rose from 46 per cent to 51 per cent in 2022-23.

The sheer (and rising) weight of essentials in poorer families’ budgets has recently left that group facing higher inflation than others. Over the five years to December 2024, as first the pandemic and then the cost of living crisis unfolded, non-housing inflation (as measured by the ONS’s Household Cost Indices) averaged 5.2 per cent for the poorest families, an annual rate more than half a percentage point higher than that for the richest families. This cumulatively dragged down lower living standards relative to those at the top by about 3 per cent – in a manner that is missed by all the standard poverty and real income figures.

Eating, heating and getting around

Not all the news about life’s essentials has been bad over the course of the last generation. Clothing prices have tumbled amid buoyant global trade through 1990s and into the 2000s, and are only 8 per cent more expensive in cash terms in May 2025 than on the eve of the financial crisis – a real-terms price fall of 37 per cent.

The evolution of food costs has, at least until recently, been relatively benign too, broadly tracking headline inflation. Over most of our period, sweeping VAT exemption and strong supermarket competition (including on basic brands and goods) helped consolidate the UK’s position as a relatively cheap place to eat. Internationally, it remains so in the latest data: as of 2023, food and non-alcoholic drink costs were 11 per cent lower than the OECD average. But recent rates of food inflation, higher than anything seen since the 1970s and concentrated on cheaper grocery products, have caused hardship. While food price inflation is much lower today than at its peak, the toll taken by the recent burst – and by ‘cheapflation’ in particular – is all too evident in the latest official poverty statistics. The proportion of working-age adults in ‘very low food security’ soared from 3.9 to 6.0 per cent between 2021-22 and 2023-24, as the proportion of very food-insecure children shot up from 5.6 to 9.4 per cent. The same numbers show a 25 per cent rise in the number of working-age adults (from 1.3 million to 1.6 million) and 40 per cent rise in the number of children (from 810,000 to 1.1 million children) whose households have turned to food banks over the past 12 months.

The real motor of the cost of living crisis, however, was household bills – particularly energy. Here, there were signs of a chronic underlying problem even before it flared up into a crisis: both gas and electricity prices have been outpacing the CPI for a very long time. The 2000s were generally a low-inflation decade, with CPI crawling up by just over 2 per cent annually and a cumulative 23 per cent between 2000 and 2010. Gas prices, by contrast, climbed nearly 150 per cent. Electricity prices were also rising – initially more slowly, but then more rapidly over the 2010s. By the dawn of the pandemic the cost of both utilities had roughly tripled from the prices of the early 2000s, a rise of around 200 per cent as against just under 50 per cent for the CPI in general. The potentially harsh effects were, for the moment, softened by increased energy efficiency: better boilers, insulation and appliances had contributed towards a 33 per cent fall in average temperature-adjusted energy consumption between 2002 and 2019.

What happened next, however, was far too rapid for technology to offer much protection: in just four years, energy costs doubled again. Electricity peaked with a cumulative rise that was more than four-fold on early-2000s prices by 2023; for gas, the cumulative rise between 2000 and 2023 was just over six-fold. The UK went from being a typical country where fuel costs were concerned, to being an outlier: by 2023, British electricity prices were the highest among 25 advanced economies that are members of the International Energy Agency. Dramatic and expensive government interventions – including a general Energy Price Guarantee, as well as means-tested schemes – relieved the strain when prices were at their height.

Nonetheless, official poverty data records the proportion of poorer non-pensioners reporting being unable to keep their accommodation warm enough doubled from 11 to 21 per cent between 2019-20 and 2022-23 (although this has dropped back slightly to 18 per cent in 2023-24). And for many, cutting back on heating wasn’t enough to prevent a rapid build-up of energy debt. Even after adjusting for inflation, British households’ aggregate energy debt has more than doubled in just five years – from £1.6 billion in Q4 2019 to £3.9 billion in Q4 2024 in today’s prices.

The third and final category of spending we focus on is Transport. After stripping out more indulgent outlays – namely flights, and buying cars rather than repairing them – spending on travel varies little by income: it accounts for 13 per cent of non-housing spending for non-pensioner households in both halves of the income distribution.

But the availability and affordability of transport is nonetheless a crucial issue for poorer Britain, not least because it directly affects opportunities to boost incomes by work. Even more than with food and energy, an extraordinary range of taxes, subsidies, investments and other public policy levers drag the state deep into transport, making it an interesting case study in how the state’s efforts are directed towards raising lower living standards – or not.

Boosting incomes versus curbing costs

Over the past few years, resurgent inflation has made the cost of living the main frame in which living standards are discussed. But it’s not usual to focus so much on prices. Barring wartime and now mostly abandoned experiments in state planning, the stress has overwhelmingly been on the other half of the equation: incomes. Governments have sought to boost earnings and raise revenues for transfer payments by pursuing economic growth, then relied on competition to drive costs down, rather than micro-managing prices.

This is still the best general approach in relation to food. The Competition and Markets Authority should be vigilant in relation to ‘food deserts’ and any evidence of a ‘poverty premium’ on prices. But even after recent inflation, the surest response to worrying signs of hunger is getting more money to families with too little, for example, by extending the welcome if modest Government proposal to raise the basic rate of Universal Credit, or by abolishing the impoverishing two-child limit.

Other costs, however, are too big and vary too much between households for feasible social security rates to cover in full. The system has long recognised this in respect of housing, where bespoke allowances take account of individual or local rents (even if now less adequately than they used to). A generation ago, household bills were too modest to warrant similarly bespoke treatment. That remains true with water: even though bills are currently rising, they started from a low base, accounting for only 2 per cent of typical expenditure for poorer families in 2022-23 (the latest year of data). A range of targeted water discounts schemes exist, funded by water bill payers, but the case for using taxpayers’ money here seems very weak when compared to the alternative of raising general income support.

But energy has become another matter. It now takes up a much more substantial share of family budgets, and recent years have shown how volatile global gas prices can be. Importantly, and different from some other essential spending like water bills or food, there is far more variation in energy use within income brackets than between them. Given the high and variable costs, the question of targeting support directly on people with high fuel needs, comes to the fore. Since the turn of the century, and particularly over the past few years, there have been a proliferation of interventions, including cash fuel payments to pensioners, the £150 Warm Home Discount on electricity bills offered to some needy households, and – during the recent price spike – the Energy Price Guarantee (EPG).

Still, this isn’t a problem that policy has yet cracked. With the public finances tight, it’s especially important to target help on those who can’t readily afford their own bills. And yet recent political history has demonstrated twice-over the difficulties with making targeted solutions stick. With a huge proportion of middling as well as poorer families threatened by the rapidly-rising energy bills of 2022, the Liz Truss Government ultimately judged it had no practical choice other than to embrace the hugely costly universal EPG. The EPG, along with nationwide £400 bill discounts disbursed through the Energy Bill Support Scheme, cost the exchequer £37 billion in total. The Starmer Government has recently extended the targeted Warm Home Discount to all working-age families on means-tested benefits, but only after exhausting an enormous political capital on trying – and ultimately failing – to apply a strict means-test to pensioners’ Winter Fuel Payments (WFPs). Its ‘U-turn’ has sacrificed around three-quarters of the savings it had initially hoped to secure, even while having to improvise a complex new affluence test. And, despite the name, WFPs will still take no account of actual winter fuel costs.

So how might support be targeted more smartly – taking account of both fuel needs and income? In principle, this could be done either directly via social security, or a ‘social tariff’ to cut prices for the needy.

The problem with the first approach is the benefits system doesn’t currently know much about energy needs, so isn’t set up to allow for high individual needs in the way it already does for high rents. Issuing cash energy payments to everyone on existing means-tested benefits is exactly equivalent to raising income support. And seeing as virtually everyone has non-trivial fuel bills to pay, offering a flat-rate discounts on those bills to everyone on means-tested benefits – which the Warm Home Discount will now do – is scarcely different from that either.

By contrast, a social tariff – a unit-price reduction in bills, targeted on poorer families and directly administered by the energy companies – would be a smarter approach. We show this by modelling three different ways to spend £1.6 billion – the estimated cost of WFPs under the Government’s new softened means test. The new WFPs are not meaningfully targeted other than on age: averaged across ages, it pays something of the order of £60 to households in each income decile. Redirecting that money through the Warm Home Discount would be worth an extra £280 to 5.7 million households in England and Wales, and concentrate the gains on poorer Britain: the scheme would be worth around £125 to the poorest households on average and falling steadily as incomes rose. Again, however, there would be no recognition of variable energy use.

If instead the £1.6 billion were redirected to a social tariff – making each unit of electricity cheaper, and with an income test that made close to half of the poorest households eligible – the effect across the income distribution would be broadly similar to an expanded Warm Home Discount. But now poor families with high energy needs would get much more relief than their less-energy-needy counterparts: within the bottom income bracket, average gains are only about £65 for the lightest users but increase to £250 for the heaviest.

Even with a social tariff, important dilemmas remain, including what happens to people just over the income threshold, and – most fundamentally – who is going to fund the extra support. Any contribution from the general taxpayer has to be weighed against other pressing calls on the public purse, including directly boosting low incomes. But, in the end, it’s hard to see any alternative to some taxpayer funding. Cross-subsidising a social tariff from other bill payers would be least feasible at precisely the moment of high prices when such a tariff would be most needed – because, at that point, higher bills become a pressure for relatively better-off families too. A politically appealing alternative might be asking the energy companies to shoulder the cost. Regulators or ministers could seek to see to ensure that some or all of the funding was instead found from energy profits by simultaneously tightening the price cap, although the adverse effect of squeezed profits on future investment in energy would need to be carefully weighed. Besides, there is no reason to think that the profits of the energy retailers (as opposed to wholesalers) will be more abundant when prices are high.

However it is funded, a social tariff would ensure that next time energy prices spike – and in an unstable world, it would be rash to assume this won’t happen – would at least ensure that the resources needed can be concentrated on the most pressing social problem. We recommend that the Government works with the energy companies to establish the necessary infrastructure now, so it is ready to use when needed.

Turning to transport, there are myriad interventions affecting both availability and cost, but these are not as well aligned as they might be with efforts to boost lower-income families’ living standards. Too little attention is paid to buses – the one way of getting around poorer Britain relies on – and the interventions made aren’t particularly well targeted. Free bus passes remain available to all over-60s in much of the UK, when the pension age is due to rise to 67 next year. Bringing the two things into line could free resources to give free, or at least discounted, passes to means-tested benefit recipients, or protect or extend bus routes in communities that are currently poorly served. In parallel, franchising could be a way for local and regional governments to shape services more proactively.

But across Unsung Britain – as across Britain as a whole – cars remain the most widely-used mode of travel. Nobody can accuse recent governments of penny-pinching on general motoring costs: £23 billion foregone by changes to Fuel Duty since 2011 (including cancelling pre-planned above-inflation rises, 15 years of freezes, and a 5p cut to Fuel Duty rates), leading to the price of a litre of petrol being at the lowest in real-terms since 2002. As things stand, the EV transition will – since electricity is not taxed like petrol – cut motoring costs again. The immediate policy problem on the horizon here is less about living standards than disappearing revenues. When the Government gets round to addressing them, smarter taxes – such as per-mile charging – could fill the gap in the public finances and avoid shifting the burden of tax from those who drive to those who do not.

In the end, affordability really is as much about income as prices. The cost of living crisis will not be fixed by tinkering with costs alone. Useful as direct action on energy bills could be, strong social security, effectively adjusted for prices, is still the single most important answer. Instead, the automatic operation of the annual inflation adjustment has been disrupted in 7 of the past 15 years: cash payments were frozen or held down to a 1 per cent capped increase. The cumulative effect has been to reduce the real effect of the basic benefit safety net by 9 per cent, and that figure is calculated on assumption that everybody faces similar inflation. As we have shown, recent inflation has not only been volatile, but also socially slanted. In such circumstances, the mechanics of that inflation adjustment become critical. They need to be improved.

The seven-month gap between September’s inflation index and the April benefit adjustment led to hardship when inflation was on the up in 2022-23: that gap should be shortened. Smaller and more-frequent inflation adjustments should take place at least It is also worth considering pegging means-tested benefits to an inflation rate that is specially calculated for the lower-income brackets. But there are difficulties, including the imprecision of such disaggregated data is one obstacle, and the politics of holding benefits below the headline CPI when prices were rising faster for rich than poor, which is what the policy would require if it were not to warp into a ratchet for rising taxpayer cost. Taking living standards seriously requires thinking through both the cost and the income side of the equation. Ultimately, having the UK economy growing, and sharing that growth widely, is the only long-term way to ensure families can afford the essentials, and more.