Housing and utility bills to swallow a third of incomes

Ben Chu

Rising utility bills and soaring rents have ignited a fire under our politicians as they scramble to demonstrate they have a credible plan to ease the pressure on household budgets.

But the great price squeeze could have still further to go, according to a report released today that forecasts the two areas could swallow up a full 30 per cent of budgets by the end of the next decade.

Electricity, gas and water bills and housing costs currently account for 26 per cent of the total spending of the average household, according to the Office for National Statistics (ONS). Housing constitutes around 22 per cent of expenditure while utility bills account for 4 per cent.

That's up sharply on 1963 when the two items together accounted for just 13.5 per cent of a typical household budget. Fifty years ago, Britain was still burning domestic supplies of coal for fuel, and sufficient new housing was being built to meet demand, both of which helped to keep a lid on costs.

In those days, spending on rent and energy as a share of outgoings was dwarfed by food bills, which accounted for 24 per cent of expenditure. Food expenditure as a share of income has fallen dramatically. Grocery bills now account for just 9.2 per cent of household budgets. But energy and rent have gone the other way.

Figures from the ONS point to a sharp acceleration in recent years. In 2007, utility and housing costs accounted for just 21 per cent of household expenditure. Since the financial crisis, average real wages have not risen in the UK. Indeed, they have been in decline as nominal pay rises have been outstripped by high inflation. Yet fuel bills and rents have risen in that time well above the general rate of inflation.

The accountancy firm PricewaterhouseCoopers (PwC) in its UK Economic Outlook, published today, forecasts that the share of household budgets being spent to keep the lights on to pay the mortgage or rent could hit 30 per cent by 2030.

It estimates that housing costs will then be 25 per cent of budgets and utility bills 5 per cent. PwC's forecasts are based on the assumption that new housing supply continues to fall short of demand and that the Government's various subsidies and levies to encourage the decarbonisation of the UK's economy remain in place over the next 15 years.

Households are being urged by politicians to exercise their consumer power in the energy market, by switching fuel providers or to cheaper tariffs to maintain the pressure on suppliers to keep down bills. There is some evidence of that taking place. The price comparison website Moneysupermarket.com reported an increase in the number of people switching energy suppliers in the wake of large hikes by the big six domestic supplier firms. Yet demand for housing and energy are "inelastic", meaning there is only so much that consumer behaviour can achieve in holding down prices.

The fact the two areas could suck up almost a third of household budgets within 15 years will inevitably leave less room for other expenditure, with adverse consequences for other sectors for the economy, according to John Hawksworth of PwC. "It means that other areas of more discretionary spending such will tend to be squeezed" he said. "For people in sectors such as clothing and transport, it will remain a pretty tough environment even after the economy recovers."

The Labour leader Ed Miliband has pledged to freeze energy prices for 20 months if his party wins the next general election. David Cameron is expected to explain this week how he will force water companies to cut bills. The Chancellor, George Osborne, has insisted that his Help to Buy mortgage subsidies will result in a surge of housebuilding, which will keep prices from taking off.