Sapped and exhausted by energy bills?
By Phil Andrew, CEO at StepChange Debt Charity.
Yesterday’s announcement by Ofgem of a 54% increase in the energy price cap was followed swiftly by announcements from the Chancellor about interventions to “soften the blow”, and today the papers are full of analysis about what it means for different types of household.
The sad reality is, from a StepChange perspective, that it seems completely inevitable that a significant number of households in debt will see their financial situation worsened — and it increases the likelihood of households “just about managing” tipping over into experiencing problem debt. This will have implications for our clients, and for our service.
As we commented yesterday, the added pressure of higher interest rates in the wake of a 0.25 percentage point rise by the Bank of England, with an expectation that inflation will peak at more than 7%, will not help soothe the concerns of worried households. And, of course, we already know there are more cost of living pressures coming down the tracks for some of our clients, whether in the form of the National Insurance increase, or in the form of the inflation-lagging uprating of benefits that equates to a real terms cut in income.
Typically, people experiencing debt have underlying problems that mean their income has reduced or they have had unexpected, unforeseen expenditure to contend with. However, “cost of living pressures” entered the top five reasons for debt among people turning to StepChange for help in November 2021, and remained there in December with 8% of new clients citing it.
For our clients, energy bills were already a source of difficulty. In 2021, around 1 in 4 new StepChange clients with a responsibility for paying energy bills were in arrears on electricity and/or gas at time of advice, up from fewer than 1 in 7 before the pandemic.
Even before the worst of the price rises, the average value of arrears among those with arrears has also increased.
StepChange new clients with arrears on electricity or gas bills:
Unpicking our client data a bit more, we can see that there are some real causes for concern about what this might mean for both our new and our existing clients.
Analysis of StepChange client data suggests that, among new clients with a responsibility for paying a gas, electricity, or dual fuel bill, 30% currently have a negative budget (where their necessary expenditure exceeds their income) at the time of advice. Without mitigation, the 54% increase in fuel bills would push this proportion up to nearly half (48%). Taking account of the support measures announced yesterday, the proportion still rises to 39%. That’s a rise of a third on current levels, and effectively leaves two in five of all our new clients with a responsibility for energy bills facing a situation where they have no money to put towards repaying their debts.
What will this mean, in practice?
First off, this might mean a change in the mix of debt solutions that we will need to offer to clients. We don’t yet have numerical projections on this, but it would be a surprise if we didn’t see an increase in the proportion of clients likely to be recommended a Debt Relief Order. It’s also possible that we might need to flex our offering — depending on whether we can realistically expect a subsequent reduction in bills, or an increase in income levels as further support may be introduced, it may make sense for some of our existing clients currently making “token” payments to extend the period over which these are offered, but this is a question currently under consideration. The lack of certainty about future conditions certainly increases the challenge of ensuring we recommend solutions that will be in the client’s best short-term and long-term interests.
Second, it means we’ll need to keep lobbying for more support. As many of today’s commentators have highlighted, the measures proposed are not sufficient to plug the gap that the price rise will leave in people’s finances — especially the finances of households who are already living in poverty, or with problem debt.
The near £700 typical increase in price capped bills is set against support that will, for many households, equate to a £200 (repayable over 5 years) energy bill rebate, plus a £150 A-D band council tax rebate. These will help cushion the blow, yet these measures combined will still only cover half the typical energy price increase. They are also complex: there are limitations on who can claim the council tax rebate that will see some needy households slipping through the cracks. An additional £150 million of discretionary funding to local authorities to help households who don’t qualify or who need additional help may struggle to reach those who need it, and although the extension of Warm Homes Discount eligibility is welcome, it certainly won’t reach some of the 48% of StepChange clients with energy arrears last year who were not eligible for means-tested benefits.
Overall, this feels like another example of people becoming fundamentally worse off, despite supplementary support being put in place (as was the case when the temporary Universal Credit uplift was removed). While economists may be able to justify the policy, the problem is that the people experiencing it at the sharpest end simply don’t have the flex to be able to adjust their finances in a way that still allows them to meet their essential needs. As we highlighted only a fortnight ago in our Problem Debt and the Credit Safety Net report, at least some of those people then turn to borrowing in many and various forms just to try to keep up with their essential expenditure. And so begin the debt spirals that ultimately — but often only after attempting to cope in unrealistic ways for extended periods — lead people to debt advice, but often not nearly soon enough to prevent them suffering damage to their health, relationships and working lives.