One-off payments targeted at poorer households and worth up to £15 billion are needed to stop rising energy bills putting millions of families into destitution this winter

The sheer scale of the cost-of-living crisis this winter will require unprecedented, targeted Government support of up to £15 billion, and is best delivered through one-off payments via the benefits system, according to a new Resolution Foundation briefing published today (Wednesday).

Pressure points examines how rising energy bills will deepen the cost-of-living crisis this winter, who is worst affected, and how the Government can best support families through these difficult times.

While everyone is feeling the squeeze this year, the report notes that poorer families are being hit hardest as they spend a greater share of their budgets on energy bills and food, both of which have helped drive inflation up to a 40-year high.

As a result, the cost of living gap – the inflation rates experienced by the poorest and richest households – is at its highest level since records began in the mid-2000s, and could get even higher this winter when the energy price cap jumps by another £800 to reach £2,800 a year.

The scale of this crisis for poorer households this winter will be underlined by a new phenomenon – severe fuel stress – whereby families could find themselves spending £1 of every £5 of their household budget on energy bills. Just 325,000 families in England experienced severe fuel stress last winter, but it could soar to 1.9 million families this winter unless significant, targeted support is provided.

Turning to how support could best be delivered, the report shows that the benefits system is clearly the best route to providing targeted support. This approach would mean 73 per cent of support would go to the poorest half of households, compared to 56 per cent under the Government’s Band A-D Council Tax Rebate scheme, just 36 per cent if delivered by cutting VAT, or 20 per cent if Income Tax was cut.

The Foundation says that the most effective way to provide immediate targeted support to the 15 million households across the UK (including 8.6 million pensioner households) who receive either the State Pension or means-tested benefits would have been to uprate benefits by far more than 3.1 per cent last month.

And while a second mid-year uprating of benefits this October would provide targeted support, the logistical challenges of doing this – particularly in terms of uprating the State Pension – mean that the Chancellor may opt instead to deliver support via one-off payments. This approach would also make it easier to compensate benefit recipients for lower benefit rates over the past few months.

The report notes that there are two broad approaches to delivering one-off payments – directly raising incomes through the benefits system (building on existing payment mechanisms like Winter Fuel Payments and the Christmas Bonus) or reducing energy bills via a rescaled and remodelled Warm Homes Discount. Energy companies would prefer the significant cash flow benefits from the latter approach, but the former should be preferred unless it faces significant administrative barriers.

Additionally, the Foundation says the Government should also consider varying the size of payments to take account of need. With large families and households with a disabled person all facing greater risks of severe fuel stress this winter, the Foundation says that these groups should receive larger one-off payments.

The scale and depth of the crisis means that effective support will not come cheap. High inflation means that the real-terms value of benefits is set to fall by £15 billion this year. Offsetting that fall would require payments to average up to £1,000 for every family in receipt of the State Pension or means-tested benefits. This would mirror the one-off energy allowance (energietoeslag) adopted in the Netherlands, where all those receiving social assistance receive payments of €800.

Given the cost of providing targeted support to avoid rising destitution this winter, the Foundation says it is inevitable the Chancellor will fund some of this support via a Windfall Tax on energy providers.

Karl Handscomb, Senior Economist at the Resolution Foundation, said:

“With many people’s energy bills due to almost double in a year to around £2,800 from October, Britain risks seeing a new phenomenon in the cost-of-living crisis – severe fuel stress that could leave almost two million families facing awful ‘heat or eat’ decisions and bills they will simply be unable to pay.

“The scale and depth of the cost-of-living crisis requires unprecedented, targeted support of up to £15 billion. Delivering that support is far from straightforward, but it can be done.

“The Chancellor should ignore calls from both political parties to deliver support via cutting income tax and VAT, and instead focus on the 15 million households receiving benefits. And having missed the chance to uprate benefits in line with inflation last month, he should announce one-off lump payments averaging £1,000 to be paid this Autumn. That would be the best way to help millions of families through what will be a very tough winter.”