Is a universal energy credit the best response to rising energy costs?
Government announced a universal €600 energy credit to every household at a cost of €1.2bn as one of the key cost of living measures in Budget 2023. While every household is experiencing rising prices caused by inflation, not every household is in crisis. It is well documented that low-income homes suffer most: people on low hourly wages or fixed incomes such as welfare entitlements. Supporting these households requires ongoing targeted measures, not one-off payments. At present, the design of the energy credit means that higher income households, who have financial buffers far in excess of those on lower incomes, gain the same in cash terms as lower income households. This is not an efficient use of resources, instead this €1.2bn should be targeted at those households most in need, those in the bottom twenty per cent of the income distribution, and those in rented accommodation.
Who is in need?
According to the latest figures from the Central Bank household net wealth grew by €9.2bn to reach €1,025bn in Q2 2022. The vast majority of this wealth is captured by the top 10 per cent of households. The question must be asked whether these households should be in receipt of an energy credit at a time when according to the latest CSO figures at least 350,000 people are living in households in arrears on their utility bills in 2021. People experienced poverty or deprivation were more likely to be in arrears on their utility bills, of the 580,000 people experiencing poverty in 2021, 16 per cent had been in arrears at some point in the previous year, with 13.1 per cent being in arrears twice or more. Of the 691,000 people in enforced deprivation in 2021, one third were in arrears, with more than one in four being in arrears twice or more in the previous year.
The €1.2bn allocated to the energy credit should be directed at those households most impacted by rising energy prices, the bottom twenty per cent of the income distribution. These are households whose main source of income is from a social welfare payment, and households whose main source of income is from low-paid employment. There is a large concentration of people on fixed incomes in the bottom twenty cent of the income distribution. People who are unemployed, long-term ill or disabled, living alone, and single parents. In addition, people living in rented accommodation are also particularly impacted by rising energy prices.
Is a universal energy credit the best use of resources?
The Parliamentary Budget Office, in an initial assessment of Budget 2023 noted that each euro spent on supports to households at every point of the income distribution, including households that do not require state support could otherwise have been spend providing greater support to those who need it most. The PBO notes that the suite of once-off measures have immediate or short-term impacts for beneficiaries but do little, or nothing, to address structural issues. The suite of once-off measures in Budget 2023 have immediate or short-term impacts for beneficiaries but do little, or nothing, to address structural issues.
The Central Bank Quarterly Economic Bulletin in Q4 2022 examines households economic resilience in light of the current cost of living pressures. This analysis finds that households are not equally exposed to consumer price increases. While the most economically precarious households spend roughly two fifths of their disposable income on essentials, the most affluent spend around a quarter. Approximately 15 per cent of all households, about 180,000 families with relatively lower income are particularly vulnerable to the current inflationary environment due larger expenditure on essentials of food and energy and limited savings buffers. Increases in food and energy prices alongside rising rents have a much greater impact on these households. Looking at potential further price increases for essentials (food, energy and rent), in a ‘severe’ scenario the central Bank analysis shows that these precarious households with limited savings buffers would see 44 per cent of their disposable income used for spending on food, energy and rent alone. Targeted, temporary supports for more exposed households will support consumption of essential goods and services until price rises abate and/or real incomes rise.
What could Government do?
A more appropriate use of the €1.2bn allocated for the €600 energy credit would be to examine how to target those households who currently do not qualify for the fuel allowance (despite the welcome expansion eligibility in Budget 2023) and ensure they can also qualify for support. One method would be to map out how to implement the OECD recommendation from the 2021 Environmental Review of Ireland to redesign the fuel allowance, delink it from heating fuels, update and expand the eligibility criteria and provide it to eligible households during the whole year. This would provide a tool for Government to target and support rural and low income households (those impacted most by inflation) now and in the years ahead as policies to meet the targets set out in the carbon budgets are implemented.