Energy price hikes and tax rises will leave Welsh households an average £600 a year worse off, even after measures to assist cost-of-living are applied, say Welsh academics.
Despite measures announced by the UK and Welsh Governments, households across all income brackets will see their income fall in April 2022 because of energy price increases and planned tax rises.
Analysis by Wales Fiscal Analysis, a research body within Cardiff University’s Wales Governance Centre, says the poorest households will be hit hardest and price rises will further limit their ability to purchase essential goods and services.
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After the measures to assist with the cost-of-living are applied, the average Welsh household on a variable tariff will still be £400 worse off in April due to energy price rises alone, and £600 worse off when tax rises are included.
For the poorest households in Wales, the energy price increases due to take effect in March alone represent an 11% reduction in their disposable income. With all help included, they will be still be £237 worse off next year – equivalent to a 4% reduction in household (AHC) income.
The UK Government has announced schemes to help with energy prices, including a £150 council tax rebate and a £200 loan scheme. Those are being replicated in Wales, along with other schemes. The report says Welsh Government's scheme is "considerably more generous than other parts of the UK" but it still means the average Welsh household on a variable tariff still be £600 worse off in April before considering non-fuel inflation. Welsh households in the poorest income decile will see a 4% reduction in their disposable income after housing costs.
What the report says:
On energy
The average household on a default energy tariff will see their bill rise by £693 a year from April 2022, with further increases likely when Ofgem updates the price cap the following winter. "This increase alone equates to 2.5% of after-housing-costs (AHC) disposable income for an average Welsh household, or 12% for the poorest Welsh income decile.
"Our previous analysis suggests that even before the recent price increase, households in the poorest Welsh income quintile spent, on average, 12% of their AHC income on energy bills."
Lower-income households spend considerably more on energy costs as a proportion of their income, but they may also be more likely to be directly impacted by the planned increase to the price cap as well. Approximately 45% of properties in the Welsh social housing sector have prepayment meters installed, compared to a quarter of privately rented homes and only 5% of owner-occupied properties.
Households with prepayment meters will often have no choice but to accept a default variable tariff set at, or just under, the price cap rather than opting for a fixed-term deal. The price cap itself is marginally higher for prepayment customers as well.
The war in Ukraine also means prices are likely to remain high. Europe imports 40% of its natural gas from Russia. The UK is considerably less reliant on Russia for gas imports than its European counterparts but prices remain exposed to trends in international markets.
In Wales, houses have relatively low energy efficiency meaning they are vulnerable to the cost of heating. Of all the Energy Performance Certificates (EPCs) lodged in 2021, only 45% were graded in the A−C categories which are seen as most energy efficient, compared to 52% in England.
Inflation
The Consumer Price Index (CPI) tracks price changes for goods and services which the average consumer buys. In January 2022, the 12-month CPI rate reached 5.5%, up from 5.4% in the 12 months to December 2021
The Bank of England now expects the CPI rate to peak above 7% in Spring 2022 –its highest level in three decades
In real terms, prices for second-hand cars are up 28.7% on 12 months ago. And compared to a year ago, the cost of fuel, furniture, clothes, and hotel accommodation are all up more than the headline rate.
Housing costs and rents have so far remained relatively low but the report warns it might change. Any change to the Bank of England’s base rate will directly impact households with inflation-tracked mortgages, and expectations of further rates rises already inform new fixed deals
The rate of inflation on households will depend on growth in income from employment and other sources. The most recent data on average weekly earnings covering the period from October to December 2021 shows that average year on year pay growth in the UK stood at 4.3%. In the private sector that growth was 4.6% and in public sector 2.6%, likely reflecting the single-year pay freeze imposed by the UK government on some – but not all – public sector workers in Wales.
Unsurprisingly, inflationary pressures will have a particularly adverse impact on households receiving benefits.
Will everyone be affected?
Although the poorest 10% of Welsh households face the biggest relative hit to their disposable income levels, the impact across the remainder of the income distribution is broadly uniform.
A household at the 25th percentile of income in Wales will see a similar relative hit to their income as a household at the 75th percentile.
Report author Cian Siôn, part of the Wales Fiscal Analysis Team, said: "Despite the interventions made by the UK and Welsh governments, a combination of inflationary pressures, tax rises and trailing income growth mean householders in the UK face the biggest squeeze in living standards in decades.
"The worrying developments in Ukraine have increased the likelihood that energy prices will remain high. Although the measures introduced by the UK Government will alleviate the impact on households to some degree, and the additional targeted support announced by the Welsh Government has helped curb the impact on those on the lowest incomes, households of all incomes will still be worse off this spring.
"The next few months are going to be challenging and these pressures will hit those on the poorest incomes the most. We know that even before recent price rises, households with the poorest incomes spent more than twice as much on housing and utilities as a proportion of their disposable income than their counterparts on the highest incomes.
"In addition to this, there remains considerable uncertainty about how high the inflation rate will climb and how entrenched price rises will be across all aspects of our lives. If high price levels persist for a prolonged period without real growth in income, this may not be the last time governments are compelled to intervene to assist with the cost of living."
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