Since Labour’s historic pledge to eliminate child poverty in a generation, poverty data has been at the forefront of political debates. The recession has created unemployment and has moved more people below the poverty line, at the same time as causing rising inequality
The causes of poverty are diverse and a recent government commissioned report has drawn attention to just one of the key factors that is pushing more families into poverty – energy bills.
Fuel poverty has become more of a concern with the cost of household bills rising and this has led to calls for more money to be invested in cutting energy bills. Fuel poverty has been redefined by Professor John Hills, the author of the report, to focus on those households with a low income and also with relatively high energy bills.
Fuel poverty is undoubtedly concerning from a moral point of view – indeed, knowing that some families are unable to afford to heat their homes causes disutility for others. However, there are also wider economic implications. If families are unable to provide heating, this may adversely affect their children’s ability to learn and complete their homework, thus negatively affecting their productivity today and arguable causing further problems in their future. While this may have little effect today, the cumulative effect on economic productivity could be substantial in the long run. Inefficiency for the macroeconomy is therefore a problem, as a child’s productive potential will not be fully realized. Furthermore, there are also health concerns, as the government notes – fuel poverty is linked to 2,700 deaths per year. Again, this creates a blight on society, but it also poses economic problems, not least due to the strain on the NHS.
Fuel poverty has long been identified as a problem that needs addressing and as the Secretary of State for Energy and Climate Change said:
‘Fuel poverty is a serious national problem and this government remains committed to doing all it can to tackle it and make sure that the help available reaches those who need it most.’
Action is already taking place to insulate the poorest homes, as a means of cutting their energy bills and the government’s ‘Warm Homes Discount’ aims to provide help to the lowest income households in paying their bills. However, there are concerns that more households will move into fuel poverty, as this new definition doesn’t include those slightly wealthier households who still have high bills or the poorer households with relatively low bills. With the economy still in a vulnerable state, the latest data showing further rises in unemployment and household bills becoming increasingly expensive, the issue of fuel poverty is unlikely to disappear any time soon. The following articles consider this issue.
Fuel poverty seen for 3 million households by 2016 Reuters (16/3/12)
Fuel poverty to rise to 8.5m, report warns (including video) BBC News, Damian Kahya (15/3/12)
Nine million will live in ‘fuel poverty’ in the next four years Independent, Simon Read (16/3/12)
Fuel poverty to rise sharply Telegraph, James Hall (16/3/12)
Call for urgent action on fuel poverty Financial Times, Sarah Neville (15/3/12)
Fuel poverty worse than estimated The Press Association (15/3/12)
3 million fuel-poor households by 2016, report claims Guardian, Mark King and Zammy Fairhurst (15/3/12)
Questions
- What are the causes of poverty?
- How has the definition of fuel poverty changed? Is the change a good one? Think about the equity and efficiency of such a change.
- The BBC News article says that government measures to alleviate fuel poverty could be regressive. What is meant by this and why could this be the case?
- What are the economic consequences of fuel poverty?
- We can estimate poverty by looking at the poverty headcount or the poverty gap. What is the difference between these two measures? Which one is a more accurate measure of poverty?
- Are there any other actions that you think would be effective in alleviating fuel poverty? Would they be cost effective?
- Why does Age UK fear ‘the current proposals to improve energy efficiency through the Green Deal and energy obligation schemes are a woefully inadequate response to one of the most serious issues facing our country today’?
Here’s an excellent article (the first link below) for giving an overview of macroeconomic thinking and policy since the start of the financial crisis in 2007. It looks at how a Keynesian consensus emerged in 2008–9, culminating in policies of fiscal and monetary stimulus being adopted in most major economies.
It also looks at how this consensus broke down from 2010 with the subsequent problem of rising public-sector deficits and debt, and was replaced by a new, although less widespread, consensus of fiscal restraint.
The article is not just about economic theory and policy, but also about the process and politics of how consensus and ‘dissensus’ emerge. It looks at the spread of ideas as a process of ‘contagion’ and how dissent may reflect the view of different defined groups, such as political parties or schools of economic thought.
Consensus, Dissensus and Economic Ideas: The Rise and Fall of Keynesianism During the Economic Crisis, Henry Farrell (George Washington University) and John Quiggin (University of Queensland) (9/3/12)
Keynesianism in the Great Recession Out of the Crooked Timber, Henry Farrell (9/3/12)
Economics in the Crisis (see also) The Conscience of a Liberal, Paul Krugman (5/3/12)
Questions
- What were the features of the Keynesian consensus in 2008–9?
- To what extent can the consensus of that period be described as the result of ‘contagion’?
- Why did consensus break down in 2010?
- How do economic experts play a political role in economic crises?
- To what extent does a lack of consensus benefit politicians?
- Why may the appearance of a consensus be more important in driving policy than actual consensus?
The rate of inflation in the UK is measured using the Consumer Prices Index (CPI). This is made up of a basket of goods and the ONS updates this ‘basket’ each year to ensure it is representative of what the average UK household buys. The basket contains 700 items, with 180,000 individual prices collected each month.
In recent years, items such as lip gloss have been added to the basket of goods and in the latest adjustment, the ONS has added tablet computers, amongst other things. This is a market that has seen enormous growth. It has been added to the basket as a means of giving a more accurate representation of the price changes faced by the average consumer. The ONS has made it clear that items are not added simply because they are new or removed simply because spending on them has fallen.
‘In each of these cases, the item has not been added because spending has increased or because the product is new on the market … It is purely as part of the rebalancing of the basket to improve its representation of overall price change.’
It is essential that these changes are made each year, as consumer buying habits do fluctuate considerably. One area in particular has been consumer responses to changes in technology. For example, developing and printing colour film has been removed as, with the development of digital cameras, this is no longer reflective of what a representative household spends its money on. Further to this, some items that have previously been used in calculating the RPI have now been added to the CPI, again to give a clearer picture of household spending in the UK. The following articles consider what’s in and what’s out.
Teenage fiction and iPads now in official UK shopping basket Guardian, Julia Kollewe (13/3/12)
Tablet computers added to UK inflation basket BBC News (13/3/12)
New items used to calculate inflation BBC News, Emma Simpson (23/3/12)
Tablet Computers Enter ‘Inflation Basket’ Sky News, Darren Morgan (ONS) (13/3/12)
Inflation basket of goods 2012: full list of what’s out and what’s in Guardian, Simon Rogers (13/3/12)
Tablet computers added to inflation basket of goods Telegraph (13/3/12)
How has the UK’s ‘inflation’ basket has changed? Metro, Ross McGuinness (27/3/12)
iPad and Galaxy added to inflation index Financial Times, Norma Cohen (13/3/12)
Questions
- What is the difference between the CPI and RPI? Which is usually higher? Explain your answer.
- How is the CPI calculated and hence how is inflation measured?
- What impact has technological progress had on the basket of goods that the representative household purchases? Do you think that technological progress make it more or less important for the basket of goods to be reviewed annually?
- Do you think products such as the iPad should be included in the CPI? Are they truly representative?
- In the second Guardian article, you can access a list of the products that are ‘in and out’. Is there anything on there that you think should be in or that should be out? Be sure to justify your answer!
What will be the effect of raising tax allowances – the threshold at which people start paying income tax? The Coalition government in the UK has a policy of raising the threshold to £10,000 by 2015/16. As a step on this road, the present plan is to raise the threshold from £7475 in 2011/12 to £8105 in 2012/13. The Liberal Democrats, however, are urging the Chancellor to raise allowances more quickly.
The government maintains that raising the personal allowance is progressive – that it will give relatively more help to the poor. New research by the Institute for Fiscal Studies, however, casts doubt on this claim. The IFS demonstrates that the benefits will be unevenly distributed, with the greatest benefits going to middle-income families where more than one person works but where no-one earns the higher tax rate. The poorest people – those earning below the threshold – will gain nothing at all.
Read the following articles and the IFS report and establish just who would benefit by a rise in the tax threshold and whether or not the move could be described at ‘progressive’.
Articles
Tax move ‘benefits better-off’ Independent, Joe Churcher (9/3/12)
Raising tax threshold would benefit rich more than poor, says IFS MyFinances.co.uk (11/3/12)
Rise in income tax threshold would help the rich Financial Times, Vanessa Houlder (9/3/12)
Budget 2012: raising the personal tax allowance threshold isn’t fair Guardian blog, Heather Stewart (9/3/12)
IFS report
A £10,000 personal allowance: who would benefit, and would it boost the economy? IFS, James Browne (March 2012)
Questions
- Define the term ‘progressive tax’.
- For what reasons might raising the personal tax allowance (a) be progressive; (b) not be progressive?
- How does eliminating child benefit for any families where either parent earns the higher tax rate affect the progressiveness of raising income tax thresholds?
- What additional measures could be taken to ensure that raising tax thresholds was progressive across the whole income range and for all households?
EDF, one of the big six energy retailers in the UK, has agreed to pay out a record £4.5m. £1m of this will go to funding an energy advice centre; the rest will go to providing £50 each to 70,000 ‘vulnerable customers’ who struggle to pay their bills and who receive the government’s warm home discount.
The agreement was made with Ofgem after an investigation into mis-selling, both on the doorstep and over the phone. Customers were persuaded to switch energy suppliers with the promise of savings on their bills. As the FT articles states:
Ofgem found that EDF’s sales force did not always provide complete information to customers on some contract terms, or on the way in which their monthly direct debits had been calculated. In some cases, telesales agents claimed savings without knowing whether they were accurate for the specific customer on the call, the regulator said.
Ofgem did not accuse the company of directly sanctioning such practices, but rather of weak monitoring and control of its sales force’s actions.
The £4.5m payment is in lieu of a fine. Consumer groups have welcomed this, preferring the company to pay compensation to a fine, which would have simply increased Treasury funding.
It is the first settlement in a broader investigation into mis-selling, involving four of the six major suppliers.
Articles
EDF to pay out £4.5m in mis-selling case Financial Times, Guy Chazan and Hannah Kuchler (9/3/12)
EDF agrees to pay £4.5m misleading sales ‘fine’ Guardian, Lisa Bachelor (9/3/12)
Is it a fine? Is it a penalty? No, it’s EDF’s mystery Ofgem payment Management Today, Rebecca Burn-Callander (9/3/12)
‘Misleading claims’ cost EDF a £4.5m payout from watchdog , Independent, Tom Bawden (10/3/12)
EDF Energy agrees to pay a £4.5m ‘fine’ BBC News (9/3/12)
EDF Energy agrees to pay a £4.5m ‘fine’ BBC News, John Moylan (9/3/12)
More energy payouts could follow EDF’s £4.5m The Telegraph, Kara Gammell (9/3/12)
Ofgem ruling
EDF energy agrees to invest £4.5 million to help vulnerable customers following Ofgem investigation Ofgem
Questions
- What types of market failure are present in the energy supply industry?
- What are the arguments for and against fines being paid directly to victims of crime rather than to the government?
- In what ways could the energy industry be made more competitive?
- Why do the utilities, such as gas, electricity and water, require their own regulator rather than simply being subject to competition law?
Since Labour’s historic pledge to eliminate child poverty in a generation, poverty data has been at the forefront of political debates. The recession has created unemployment and has moved more people below the poverty line, at the same time as causing rising inequality 
