Poverty Proofing against the Poverty Premium

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A poverty premium is the extra cost that low income households face when paying for the same goods, services and amenities as wealthier households. A Report commissioned by the U.K. charities Fair by Design and Turn2us, undertaken by the University of Bristol, and published in November 2020 found that low income households paid an extra £478 a year in poverty premiums in 2019.

The Report focused on the costs relating to gas and electricity supply, various insurances such as car, appliance and home contents, the costs of accessing money and the higher costs of credit associated with low income households.

The authors surveyed users of the two commissioning charities and created focus groups of those in low-income households to consider different aspects that may impact on poverty - such as age, general financial difficulties, or having a young family. They noted that not switching energy suppliers to ensure the best tariffs was a large factor in high costs and that capacity, literacy and digital literacy played a large part in households not switching. They recommend that customer loyalty should be rewarded rather than penalised, making it easier, especially for older households, to better manage utility bills.

Another finding was that area-based premiums, linked to insurances for car and home contents, tended to rise if households lived in what were considered to be ‘high risk areas’, resulting in a poverty premium of, in some cases up to £300 per year.

The Report also indicates that whilst some forms of high cost credit have become cheaper over the past three years, subprime loans, short term loans and door stop loans (loan types all traditionally associated with lower-income households or households with poor credit histories) have all increased in cost.

There is limited research, in an Irish context, on the extent of the poverty premium paid by low income households. However, research undertaken by TASC this year found that household debt remains high, with Ireland the fifth most indebted country in the European Union¹.

The TASC Report delineates between borrowing by choice or borrowing to cover necessities. If a low income household has to borrow to pay for the essentials, the Report finds that they, “depending on their need and access to lines of credit, may even pay significantly more in interest and other costs for the loans than households with higher income”. Lack of or limited access to financial products and services was also found to result in households paying higher costs as this “result[s] in inability to avail of mainstream, cheaper credit options, and thereby a need to rely on more expensive, sub-prime or alternative sources”.

Similarly, research undertaken by Dr. Stuart Stamp in conjunction with the Money Advice and Budgeting Service (MABS) ²which focused on energy (fuel) poverty in differing communities in Dublin also noted that low income households paid more for the same service. One report found that the “MABS clients interviewed spend more on fuel and light that the population as a whole; not just a higher proportion of their income, but more money…. (These) households spend an average of €50 a week on fuel and light, whereas the figure is €38 for the general population”. Another MABS report found that the Travelling community spent even more, over €100 per week on fuel and light, which is almost three times the general population. ³

The experience of low-income households accessing credit in the UK Report is also mirrored in an Irish context in earlier research conducted in the area of financial exclusion. Collard and Kempson (2005) ⁴found that those on low incomes are often restricted from accessing mainstream credit, turning instead to subprime and high-cost credit alternatives. While a low income does not always mean over-indebtedness, the report found that there was a significantly higher instance of over-indebtedness among households with gross annual incomes of under £10,000 (23 per cent) than among households of more than £35,000 (5 per cent). The result of this financial exclusion⁵ is that over-indebted and low income consumers are excluded from banking services on the basis of charges and conditions attaching; affordable credit on the basis of conditions attaching and difficulty of the application process; and insurance, as low-income consumers are more likely to live in disadvantaged areas, incurring a higher premium. Gloukoviezoff defines the process of financial exclusion as (2011:12)⁶:

…the process whereby people face such financial difficulties of access or use that they cannot lead a normal life in the society to which they belong.

In their 2011 study, Russell et al (2011) found that Ireland had the highest instance of banking exclusion among the EU15 States and that those who are economically and socially disadvantaged, and those on low incomes, are at most risk of financial exclusion (2011:29).

There are currently 637,000 people living in poverty in Ireland, of which approximately 193,600 are children. Almost 100,000 people living in poverty are in employment -the “working poor”. There are also 886,000 people experiencing enforced deprivation, where they do not have the resources necessary to provide the most basic necessities. Despite wage growth, increased employment and very high rates of economic growth last year, these figures show that a significant proportion of the population is still living in very difficult circumstances.

In our publication ‘Building a New Social Contract – Policy Recommendations’⁷ Social Justice Ireland called on Government to commit to poverty proofing policies, particularly those which most affect low-income households. This must be based on evidence, such as the cost of Ireland’s poverty premium. We have also previously called for the benchmarking of social welfare rates to average weekly earnings as a step towards providing a minimum essential standard of living for all⁸.

1 Lajoie, A (2020): Exploring Household Debt in Ireland, TASC: Dublin

2 https://www.researchgate.net/publication/324647620_Left_Behind_in_the_Co...

3 ttps://www.researchgate.net/publication/334330222_Accommodating_Ethnicity_Addre...

4 https://research-information.bris.ac.uk/en/publications/measuring-financ...

5 Corr, C. (2006) Financial Exclusion in Ireland: An exploratory study and policy review. Dublin: Combat Poverty Agency

6 Gloukoviezoff, G, 2011: Understanding and Combating Financial Exclusion in Ireland: A European Perspective. What could Ireland learn from Belgium, France and the United Kingdom? Dublin: The Policy Institute, TCD.

7 https://www.socialjustice.ie/content/publications/building-new-social-co...

8 https://www.socialjustice.ie/content/policy-issues/new-government-should...