A Minimum Income Standard for Britain 2009

A minimum income standard for Britain in 2009

Donald Hirsch

Abigail Davis July 2009 Noel Smith

This study updates 2008's innovative research, based on what members of the public thought people need for an acceptable minimum standard of living.

This report shows:

•What different familytypes need to earn to

meet the minimum income standard;

•How much the cost of a minimum household budget

has risen since the originalresearch in2008.

Exploratory research with members of the public involved inthe 2008 project suggests that even intoday's tough economic climate, people maintain their viewof what things are needed to participate fullyin society. As such, this is an important contribution to debates about what is happening to livingstandards and poverty during the recession.

www.jrf.org.uk

Contents

Acknowledgements  4 Executive summary  5 Introduction  7

1 MIS and changes in prices  9

2 MIS and changes in living standards: what

is included in the minimum  18 3 The 2009 budgets  23 4 Conclusion  28

References  29 Appendix 1 Illustrative application of applying

household expenditure rises to estimate a

cost of living increase  30

Aminimum income standard forBritainin2009 3

Acknowledgements

We are grateful to Nina Oldfieldand Yekaterina Chzhen fortheir work inanalysing the data used inthis report, and to colleagues at the Centre forResearch inSocial Policy (CRSP) fortheir assistance, inparticular Jacqueline Beckhelling forher contribution to the repricing work. We would also liketo thank the participants in

three focus groups held inDerby inApril2009 fortheir valuable expertise inhelping us to

think about the possible effects of recession

on MinimumIncome Standard (MIS).

The report benefited from a discussion on

an initialdraft involvingJames Arthur, AlexBeer, Helen Dent, Adrian Richards and Robert Walker . We wish to express our appreciation to JRF forits continuing support forMIS,and especially to Chris Goulden forhis guidance and valuable input.

Executive summary

This report is the first annual update of the Minimum Income Standard for Britain (MIS), originally published in 2008. The standard is based on research into

what members of the public, informed where relevant by expert knowledge, think should go into a budget

in order to achieve a minimum socially acceptable standard of living.

The report considers two aspects of uprating the standard for 2009: changes in prices that influence the cost of a minimum basket' of goods and services, and changes in living standards that may influence what items should be included in that basket.

Price uprating

Overall,prices inthe UKhave changed littlein

the past year – the Retail Price s Index (RPI)has declined slightlyand the Consumer Price s Index (CPI),which excludes mortgages and some other housing costs, has risen slightly.However, neither of these indices gives an accurate description of what has happened to the cost of a minimumhousehold budget. This includes a different collection of

goods and services from that used forinflation indices, which are based on general spending patterns. Since the prices of different types of goods and service are rising or fallingat different rates, an overall household budget may rise by different amounts depending on its composition.

The uprating research started by estimating

the change inthe cost of a minimum budget by applying the RPIinflationrate foreach category of commodity (such as food, clothes) to the 2008 MIS budgets. This showed that the cost of minimum budgets forvarious household types went up by an average of 5 per cent inthe year to April2009. This contrasts with a fallof over 1 per cent inthe RPIand a rise of 2½ per cent inCPI. The difference results principallyfrom a) relativelyhigh inflationrates for

food, fueland public transport, which take up a larger proportion of the budget of someone on the minimum than of an average household budget,

and b) from the fact that a minimum budget does not include mortgages or motoring costs, two items whose prices have fallensharply since April2008.

The research also looked more closely at the MISinflationrate by gathering information on how prices of individualitems inthe budgets have changed. This was to check that officialinflation figures foreach category of item broadly reflects price rises of MISitems withinthat category – for example, that overall food inflationis similarto the rise inthe cost of the specific food items identified inthe originalresearch. This analysis suggested

that the actual cost of the minimum budget may have risen by somewhat more than 5 per cent. However, itis difficultto measure this precisely since many products selected in2008 are not available inexactly the same form in2009. The analysis concludes that the MISinflationrate calculated from RPIdata is sufficientlysimilarto

the rate based on repricing each item that the former can be used forregular uprating of MIS.

Changing living standards

The minimum income required to reach a socially acceptable standard of livingwillchange with social norms, which are influenced by prevailing livingstandards. MISwilltherefore be periodically rebased using fresh research. Inthe meantime, ithad been intended to estimate an annual

rise inMISabove inflationto reflect real rises in average household spending. However, with economic growth having gone into reverse,

and no spending data yet available forthe past two years, this method cannot now produce

a plausible estimate of how the minimum

may be changing inreal terms. Therefore,

the 2009 adjustment shows inflationonly.

However, the research did explore whether attitudes to the minimum may be changing as

a result of recession, through discussion of

this issue inthree focus groups. This was to

give preliminaryindications only, and was not detailed enough to produce reliable revision of the budgets. Participants inthese discussions came to very similardefinitions of the minimum to the originalresearch, and drew up almost identical lists of items. However, they also indicated

that a more careful attitude towards spending

and consumption is developing, with a greater tendency to shop around' to achieve a given standard of livinginthe most economical way possible. Whileitis too early to say whether this should alter the levelof the MinimumIncome Standard, the discussions showed that recession creates important issues forMISand suggests

the need foran early revisitof the budgets.

Budgets for April 2009

Inthe new budgets, a single person requires £168 a week excluding rent, up from £158 in2008. This requires earnings of £13,900 a year (based on assumptions about minimum housing costs). Anew online MinimumIncome Calculator makes itpossible to calculate the equivalent formost household types inBritain, and to make adjustments forthe levelof rent/ mortgage and certain other fixedcosts.

These budgets require a wage above the minimum wage of £5.73 an hour formost family types with one full-timeworker. Benefits fallwell short of providing a minimum acceptable income on this measure, although pensioners claiming the Pension Credit get enough to meet the standard. Despite the fact that benefits rose faster than headline inflationinthe past year, they have gone up by no more than the effective inflation rate forpeople on the minimum, and therefore represent similarproportions of the MISas they did in2008 – less than halfthe minimum standard forpeople of working age without children. However, MIShas risen as a percentage of median income, and therefore is inmost cases further above the poverty linethan itwas a year ago.

Conclusion

This report shows that the cost of a minimum livingstandard rose by about 5 per cent inthe

year to April2009, even though prices overall fell. Fortunately forpeople on the lowest incomes, benefits rose by a similaramount to MIS,above

the headline inflationrate. But some people

losing their jobs are stillhaving to survive on less than halfof what members of the public think

is needed to achieve an acceptable standard

of living.Tough economic times may eventually cause some rethinking of what is a necessity'

but early evidence suggests that people have a robust viewof what itmeans to have the things you need to participate fullyinsociety. Withpeople's incomes vulnerable at a time of recession, the

risk of fallingbelow this norm has increased.

Introduction

How much is needed to achieve a minimum acceptable standard of livinginBritaintoday? In2008, the firstMinimumIncome Standard for Britain(MIS)gave an answer to that question

based on detailed research into what ordinary people think should go into a minimum

budget, supported by expert knowledge

on certain physical livingrequirements,

including nutrition (Bradshaw, et al., 2008).

As part of that project, there was a commitment to keep MISup to date. Its finalreport noted that rises inlivingstandards are likelyto change the social norms that determine what is included in

the minimum, whilerising prices change its cost.

Onlytwelve months later, this issue of

updating looks very different. For the firsttime in

17 years, incomes (and hence potentially living standards) are falling.For the firsttime in50 years, prices overall have gone down. These changes intrend do not make itany less important to

update MIS,but may alter the approach that

we use to do so. This updated report includes

the results of new research which starts to

explore the impact of recession on attitudes to what constitutes a minimum livingstandard.

The report considers inturn the two components of potential change inthe levelof MIS:

now available infullon a revised online Minimum Income Calculator at www.minimumincome. org.uk. This allows users to specify the number and ages of familymembers and to adjust forsome fixedcosts such as rent, inorder to personalise a minimum budget. Users can also see the gross earnings or pension that their familywillneed inorder to achieve that budget.

• the changing cost of a minimum basket of goods and services, and

• whether the contents of such a basket should be changing.

Itthen summarises a revised set of budgets, updated to April2009, looks at what incomes are needed to afford these budgets and compares these to benefits, to the poverty lineand to earnings on the National Minimum Wage. Itconcludes with a reflection on how approaches to a minimum income standard

are affected by a changed economic climate.

Box 1 summarises the main features of MIS. For further detail, see Bradshaw, et al., 2008. The results of MIS,updated to April2009, are

Box 1: MISinbrief

What is MIS? The MinimumIncome Standard is the income that people need inorder to reach

a minimum socially acceptable standard of livinginBritaintoday, based on what members of the public think. Itis calculated by specifying baskets of goods and services required by different types of household inorder to meet these needs and to participate insociety.

How is it arrived at? Asequence of groups have detailed negotiations about what things a familywould have to be able to afford inorder to achieve an acceptable livingstandard. Experts check that these specifications meet basic criteria such as nutritional adequacy, and insome cases feed back information to later groups that check and amend the budgets. Each group typicallycomprises six to eight people from a mixture of socio-economic backgrounds, but each group has people from the particular demographic category under discussion – e.g. pensioner groups decide the minimum forpensioners.

What does it include? Groups inthe originalresearch defined MISas follows:

Aminimum standard of livinginBritaintoday includes, but is more than just, food, clothes and shelter. It is about having what you need inorder to have the opportunities and choices necessary to participate in society.

Thus, a minimum is about more than just survival.However, itcovers needs, not wants: necessities, not luxuries. Inidentifyingthings that everyone should be able to afford, itdoes not attempt to specify extra requirements forparticular individuals and groups – e.g. those resulting from livingina remote location or having a disability.So not everybody having more than the minimum income can be guaranteed to achieve an acceptable livingstandard. However, anyone fallingbelow the minimum does not achieve such a standard.

To whom does it apply? MISapplies to nuclear' familiescomprising a single adult or couple with or without dependent children. Itcovers most such households, with its leveladjusted to reflect their make- up. Itdoes not cover familieslivingwith other adults, such as households with grown-up children.

Where does it apply to? MISwas calculated as a minimum forBritain,and does not yet include Northern Ireland, where a separate minimum is to be published inlate 2009.

How is it related to the poverty line? MISis relevant to the discussion of poverty, but does not claim to be a poverty threshold. This is because participants inthe research were not specifically asked to talk about what defines poverty. However, itis relevant to the poverty debate inthat almost allhouseholds officiallydefined as being inincome poverty (having below 60 per cent of median income) are also below MIS.Thus households who face relative poverty on this measure are generally unable to reach an acceptable standard of livingas defined by members of the public.

Who produced it? The originalresearch was funded by the Joseph Rowntree Foundation (JRF).Itwas conducted by the Centre forResearch inSocial Policy (CRSP) at Loughborough Universityinpartnership with the FamilyBudget Unitat the Universityof York.This update was conducted by CRSP, again with JRF funding.

When was it produced and how is it being updated? The originalresearch was carried out in2007 and the findings presented in2008 were costed using April2008 prices. Inthe long term, the intention is to re-examine the public's definitionof contemporary needs every few years. Inbetween these rebasings', the budgets are being updated to reflect changes inprices and, where relevant, changes in livingstandards.

1  MIS and changes in prices

To calculate the current value of MIS,the cost

of buying the specified baskets of goods and services needs to be adjusted to take account of price changes. The Retail Price s Index (RPI),which shows changes inprices ingroups of goods and services categorised inthe same way as MIS,gives data which allow adjustment without carrying out additional originalresearch. However, withineach category of spending, we cannot be sure that price rises are the same forMISitems as forthose on which the RPIis based. For example, ifluxuryfoods were to rise quicklyinprice but basic foods were

to stay the same, and ifMIScontained principally basic foods, the RPIwould exaggerate the extent to which a minimum budget became more expensive. For this reason, in2009 the actual items inMIS were re-priced by the research team. The idea

was to test the degree to which the inflationindex could infuture serve as an approximation for

actual changes inthe cost of the MISbaskets.

How much has MIS risen based on inflation figures?

Overall,the RPIsuggests that prices inApril2009 were very similarto those inApril2008: on average, they were 1.2 per cent lower. Is there then any need to alter the levelof MISbecause of changing prices? Ifso, should itbe downrated' rather than uprated?

Infact, an overall measure of inflationtoday

can give a highlymisleading picture of the rise in the cost of livingforan individual.This is because different goods and services are changing in

price at very different rates. Inthe year to April 2009, the components of the RPIvaried hugely inthis respect, ranging from a fallinthe average mortgage interest payment by 47 per cent to a rise inthe average cost of solid fuelby 30 per cent.

The importance of these different price changes to the overall inflationrate is determined by the weights given to them inthe RPI, which are based on overall spending patterns. However,

as demonstrated inthe firstMISreport, there

are considerable differences between MISand overall spending interms of the relative importance of different types of goods and services. For example, fora single working-age adult, food represents 25 per cent of a minimum budget (excluding rent/mortgage), but only15 per cent

of actual spending by an average household measured inthe officialsurvey of household spending, the Expenditure and Food Survey

(see Bradshaw et al., 2008, p.32, Table 4).

To adjust MISforrising prices based on the RPI, therefore, the inflationrate foreach group of commodities measured inthe RPIwas applied to the equivalent elements inMIS.For example, since food is shown by the RPIas rising by 9 per cent, the 2008 food budget foreach type was inflated by 9 per cent to produce the food budget for2009.

Adding up these components produced

total MISbudgets for2009 that are consistently higher than the 2008 budgets, by between 4.7

per cent and 5.4 per cent. These apply to the headline totals after rent/mortgage and childcare. These MISinflationrates are between 0.4 and 0.9 percentage points lower when housing and childcare are included. The results forfour family types are shown inFigure 1. Overalltherefore, a minimum budget (net of housing and childcare) rose by about six percentage points more than the RPIand by two to three percentage points more than the Consumer Price s Index (CPI),which rose 2.3 per cent inthe year to April.(RPIis a wider inflationmeasure than CPI; the latter excludes mortgages, Council Tax and some other housing costs, and is calculated ina different way).

Figure 1: Inflationrates forfour familytypes, April2009

6

MIS budgets excluding MIS budgets including rent rent and childcare and childcare

5

4

3

CPI = 2.3%

2

1

0

-1

RPI = -1.2%

Single working Pensioner Couple +2 Lone parent +1 age couple children child

This striking findingthat the cost of a minimum budget is rising much faster than general inflation is not difficultto explain. Quite simply, things

whose prices are rising the fastest tend to be over-represented ina minimum budget compared to the RPI, whileitems whose prices are falling

are under-represented. Put another way, those goods and services that people on the minimum income spend proportionately more on than average tend to be items whose prices are rising fastest. This is shown inTable 1, which lists the RPI inflationrate foreach category of items alongside the weighting itis given inthe RPIand inan MIS budget fora single person of working age.

Table 1: Inflationrates of spending categories and their importance inthe RPIand MIS,April2009

*Thisfigure uses the actual average rise ina council rent inthe reference local authority (Loughborough), rather than the RPI. This is because the originalMISused the council rent to illustrate the minimum, and the RPIcombines inone category social and private rents, which have been moving inopposite directions.

Figure 2: Composition of MISand RPI, by inflationrate of various categories of goods and services, April2009

100

90

80

Negative inflation categories (prices

70

falling)

60

Medium inflation categories (rose 2.5%–

50 40

6%)

High inflation categories (rose 7% or more)

30

20

10

0

MIS (single working age)

The effect of these differences is more clearly demonstrated inFigure 2. Itshows that categories of goods and services that have falleninprice (mortgages, cars and clothes) comprise only3 per cent of an MISbudget, but count fora fifthof RPI. Conversely, high-inflation categories – food, fueland public transport – between them comprise a third of an MIS budget, but less than one fifthof the RPI.

These patterns, shown here fora

single working-age adult, are repeated

across allthe MIShousehold types.

Comparison between indexed and re-priced inflation rates

During April2009, the MISteam re-priced items included inthe originalbudgets, using information published on the internet and in-store information. This was necessarily an imperfect process, since not allproducts are defined inidentical ways

from one year to the next, and fluctuating prices and discounting policies made the task more complicated. Where necessary the team took pragmatic decisions about closest substitutes. Also, some items (e.g. amount spent on birthday presents) were expressed as a cash sum rather

12

RPI

than a specific set of items. Inthese cases, comprising on average about a fifthof budgets for familieswith children and a third forthose without, an RPIinflationrate forthe relevant category was applied, meaning that inrealitya comparison between re-pricing and applying the relevant inflationrate was applied to most but not allof the budgets (after housing and childcare costs).

Table 2 shows, forthe four familytypes that have been used to illustrate MISresults, the inflationrate using a re-pricing method alongside the indexed method, and the difference inthe uprated MIStotals using each method. This analysis does not include housing costs, since

the indexed method used the re-priced figure for a council rent (see note to Table 1 above). For familieswith children, the table includes totals with and without childcare. For this large item, the re-priced total did not rise because the providers consulted had not put up their prices. On the other hand, the RPIshows that domestic services, of which childcare is a part, rose by about 3 per cent, and childcare costs were rising faster than this inEngland according to the annual Daycare Trust survey published inJanuary 2009 (Daycare Trust, 2009). The correct inflationrate forthis large item is thus hard to determine accurately.

Aminimum income standard forBritainin2009

Table 2: Indexation compared to re-pricing (£per week)

Overall,these re-pricing results suggest that the to re-price the items each year when uprating the extent to which inflationof a minimum budget is budgets, and that a new pricing exercise should higher than general inflationmay be somewhat be carried out onlywhen a new set of items has underestimated by using RPIdata: when excluding been identified by fresh research (rebasing'). childcare from the analysis, allfour budgets show

a higher re-priced than indexed MISinflationrate

of between two and four percentage points.

Despite these discrepancies, the results do

not seem to suggest that MISitems incertain

categories are systematically rising faster than

suggested by the RPI. Table 2 shows that,

compared to the overall rise inprices on both

measures, most differences between the re-

priced and indexed results are relativelyminor.

There are a number of cases where there are more

significant differences, but these do not follow

obvious patterns. For example, on three of the

food budgets the re-pricing results suggest that

the indexed increase may be an underestimate

of the real rise incost of the budget, but on a

fourth itsuggests the reverse. The one category

that does appear to show a pattern is clothing,

which fellinthe RPIbut rose by up to 4 per cent

inMIS.However some caution is needed in

interpreting this difference, since inmany cases

itis difficultto findidentical items to compare

from one year to the next. Insome cases where

cheaper options had become available, itwas

not possible to say with confidence that these

were the same quality as the equivalent items the

previous year, so a cautious approach was taken

towards including clothes at reduced prices.

The conclusion must therefore be that price

indices are at present a reasonably reliable means

of estimating changes inthe MISbudgets. They

are readily available without extra research, and

do not appear to introduce undue inaccuracies.

Even though they are not a perfect measure of

the increase ina minimum budget, the alternative

of direct re-pricing also has considerable

imperfections, described above. Moreover as time

goes on, fewer of the items originallyspecified in

the budgets willbe on the market inthe same form,

and a re-pricing method willtherefore become

more loosely related to the originallist.Using the

RPIis another way of expressing the price trend

forthe kinds of items included inthe budget, and

as shown above produces similarresults. This all

points to the conclusion that itis not necessary

2 MIS and changes in living standards: what is included in the minimum

The MinimumIncome Standard involves a contemporary definitionof what livingstandard is required to participate insociety. This necessarily changes over time. What society considers