As winter closes in and temperatures drop, heavily indebted households in Britain will face grim choices about when and whether to turn their heating on. Already, debts to energy suppliers are rising rapidly.
As households fall further into debt, cutting back on other spending, that’ll push us further into recession
More than two million households owe debts to their suppliers – up two-thirds since the end of 2020, and a record figure. Their debts total at least £2.1 billion, the highest since at least the financial crisis 15 years ago. These figures, the latest available, are from before the most recent price hike in October. Already in October, Citizens Advice was reporting that record numbers could not afford to top up their prepayment meters.
The government has provided some support to households in the Energy Price Guarantee. This capped the typical household bill at £2,500 a year in October. But this typical bill is still double what it was a year ago – and there is another sharp increase expected in April, as the guarantee comes to an end.
Rapidly increasing energy prices have been the biggest culprit behind the squeeze on living standards. Gas prices for domestic consumers are expected to remain very high right throughout 2023 and into 2024, even if some of the pressures on European supply from the Ukraine war ease somewhat. Those high energy prices have been joined, over the last year, by rapid increases in the price of food, with average food prices rising more than 14 per cent in the year to October.
For specific items, the price rises have been far worse – vegetable oil is up 46 per cent, with supplies from major producer Ukraine massively disrupted. New research by National Statistics, using supermarket pricing data, has found that the lowest-priced and most essential items have risen much faster than average over the last year.
These pressures are unlikely to ease. Russia’s invasion of Ukraine hasn’t only disrupted food supplies and pushed up prices this year, with Russia and Ukraine between them supplying nearly a quarter of the world’s wheat exports. Russia supplied 25 per cent of the world’s potassium fertiliser pre-war, an essential input for modern farming. Disrupted supplies have pushed its price up 190 per cent in the last year – meaning huge profits for fertiliser producers, but creating huge cost pressures for farmers. Consultancy McKinsey estimates that this year’s global grain supply is down 20 million tonnes on last year, and expects up to 40 million tonnes lost next year – equivalent to a “year’s worth of nutrition for 250 million people”.
Losses on this scale would be hugely disruptive – not only threatening famine across the Global South, as the UN Secretary General has recently warned, but also dragging the relatively protected developed economies into the maelstrom. One forecast by the Centre for Economics and Business Research suggests that British households will be spending £1.1 billion more a month on food this time next year.
For the better-off, these shocks can be more easily absorbed – they have more income and potentially higher savings to compensate for higher prices. But for those without savings and on lower incomes, further price shocks are likely to push them further and deeper into debt.
Total borrowing by UK households actually fell during the pandemic, driven mostly by better-off employees unable to spend so much under lockdown and paying down their debts. But that has completely reversed over the last 12 months, with households adding more and more debt to their existing piles on things like credit cards and store credit.
This isn’t some shopping spree. Accountancy firm EY puts the rise in this “unsecured” (non-mortgage) lending down to the cost of living crisis. As prices of essentials have risen, households, faced with unavoidable extra costs, have turned to short-term borrowing to get through.
Domestic gas prices will remain high for the foreseeable future. Food prices are expected to climb further. Borrowing to cover unavoidable spending, with no real prospect of prices coming down, is clearly not a sustainable situation. As households fall further into debt, cutting back on their other spending, that will, in turn, help push the economy further into a recession already forecast by the Bank of England to be unusually prolonged.
There may be little that can be done immediately about soaring international food and gas prices. But one rapid release for some of this pressure on households would be to write off the accumulated energy debts of households, as demanded by Debt Justice. With government already set to spend billions through the Energy Price Guarantee on controlling energy prices, the case for a write-off of existing energy debts, built up during the crisis, is becoming very clear.