The energy bills emergency has barely begun

When I graduated from university in the summer of 2011, I landed straight into the aftermath of the global financial crisis and the height of the Conservative government’s austerity programme. UK unemployment was at its highest level in 16 years, real disposable incomes had just fallen by 2 per cent, and in August, riots erupted in London and a handful of other cities.

For those of us who came of age during that period, it felt like a generation-defining economic shock. Unfortunately, I now realise it may not even come close to holding on to that title.

Over the full five-year slump from 2007-08 to 2012-13, British living standards declined by a cumulative 3.4 per cent, with the hardest hit group — the highest earners — squeezed by almost 5 per cent. Fast forward 10 years and UK inflation has hit a 40-year high of 10.1 per cent while the average energy bill is on track to more than double by next spring. The coming months are on course to deliver the largest cut to real disposable household incomes in Britain since records began, while brutally inverting the gradient of who suffers the most.

Even in the middle of summer, before the anticipated rise in energy bills for the fourth quarter, huge numbers of British households are being pushed to the brink. During July alone, 2,271 people told the charity Citizens Advice that they could not top up their prepayment energy meter, leaving them unable to turn on the fridge or cook food. The equivalent figure at the height of last winter was 1,444.

With longer, cooler nights on the horizon and the announcement of the October bills increase just a week away, most attention has focused on how to mitigate the icy grip of the winter months, but the worst may not arrive until spring.

Both the existing government support packages and Labour’s proposed freeze on bills only span the six months from October to next March. However, the latest projections from industry analysts at Cornwall Insight and Auxilione place the peak of charges in April, when annual tariffs could climb as high as £5,000.

In the absence of any new support come the spring, disposable income after housing costs would fall by almost 7 per cent in real terms across the population as a whole, according to analysis by the Tony Blair Institute for Global Change. This is by far the biggest contraction since records began in 1961.

Monthly outgoings for the poorest tenth of households would be £155 higher next April than today, instantly wiping out 17 per cent of net income. For a group whose post-tax income already falls short of covering essential spending, this would be nothing short of catastrophic. The typical household in this bracket has just over £1,000 in liquid financial wealth to fall back on. They would burn through those reserves in just five months at April-level prices with no scope to cut back elsewhere short of choosing between heating and eating.

Far from being a problem exclusive to those at the bottom of the income spectrum, a Citizens Advice survey this week found that one in four British households will be unable to pay its energy bills after the anticipated near-doubling of the price cap in October. More than half this group are ineligible for the two £325 support payments the government is providing to people on benefits.

Such pervasive precarity underscores how little headroom many British households have. Even almost half way up the income distribution, where households were saving about £150 a month before the cost of living crisis hit, April’s bill increase would see all of those savings and more evaporate in the absence of significant cutbacks on discretionary spending, tipping them into a deficit. And in a comfortably-above-average household with gross income of around £45,000, the April increase could wipe out as much as two-thirds of monthly savings.

Millions of British households are already financially underwater and a tsunami is bearing down. To avert disaster, fresh support packages must be rolled out well in advance of the spring, and they must far exceed what is already on the table for October.

john.burn-murdoch@ft.com
@jburnmurdoch