The Cost of Living Crisis in Scotland: analytical report

Executive Summary

This report draws together analysis from a wide range of sources to provide an overview of emerging evidence on the cost of living crisis. It includes evidence from Scotland and the UK as well as from other European countries. The report has been produced by a cross-government group of analysts.

The latest UK Consumer Price Index (CPI) shows inflation is running at 10.1%, the highest level since 1982. By comparison, at the end of last summer inflation was 2%. The Bank of England is currently forecasting that the UK will enter recession later this year and remain in recession for much of 2023. The Scottish economy is forecast to contract in 2023. Interest rates have risen to their highest level since 2009.

The high rate of inflation has contributed to a cost crisis – more commonly referred to as a 'cost of living crisis'. This crisis follows the Covid-19 pandemic, Brexit and a period of prolonged austerity. It will have detrimental effects on businesses, communities, households, public sector budgets and the delivery of key public services. The negative impacts of rising costs are already being felt in Scotland and are likely to intensify over the coming months.

The First Minister has committed to 'continue to take all actions available to us within devolved responsibilities and budgets' to address cost pressures. The Scottish Government's immediate and overriding priority in its recently published 2022/23 Programme for Government (PfG)^[1] was 'to ensure households, businesses and other organisations, as well as the public services that support them, are protected from the worst impacts of the cost crisis'.

Given the pace at which the cost of living crisis is unfolding and the lack of peer-reviewed articles published to date, further analysis will be required over the coming months to more fully understand the emerging consequences of the crisis. However, throughout this report a number of common themes emerge from the analysis.

The cost of living crisis presents serious economic and social challenges for Scotland and the UK.

We are currently witnessing rates of inflation not seen in the last forty years. Economic conditions have rapidly deteriorated since the start of 2022. UK inflation has risen sharply from 0.5% in February 2021 to its current rate of 10.1% in September. It is projected to peak at just under 11% in October. Wages have risen at a much slower pace than inflation putting considerable pressure on household incomes.

Despite the UK Government's Energy Price Guarantee, energy prices have more than doubled over the last year and Scottish Government modelling^[2] estimates that there are around 860,000 (35%) fuel-poor households in Scotland, of which 600,000 (24%) will be in extreme fuel poverty.

The cost of living crisis is high in the public consciousness and an issue of significant concern. This report contains analysis from a range of sources describing some of the difficult decisions and trade-offs households are having to make due to the rising costs of essential goods. This situation is further compounded as many low income households have limited financial resilience and have entered the cost of living crisis with a backlog of arrears and debt as a result of austerity, reforms to the UK benefit system and the pandemic.

The crisis is placing significant additional pressures on public and third sector services. It is already negatively affecting mental and physical health and driving up demand for health and social care services. Demand is increasing for third sector services such as food banks and advice services. The fact that demand is increasing at a time when the cost of delivering services is rapidly rising suggests that public and third sector services will come under sustained pressure this winter leading to difficult choices.

The cost of living crisis will affect particular households, services and sectors of the economy very differently.

While the crisis will affect all households and businesses, some groups and organisations will be affected more than others. This report includes data illustrating the effects on businesses in Scotland. It shows that business costs have significantly risen over the past year due to rising prices for energy and materials alongside rising labour costs. This presents real challenges for businesses as they continue to recover from the pandemic and ensure the resilience of cash-flow in the face of increasing demand conditions.

The report examines evidence on the types of households that are likely to be most negatively affected. Low income households are most at risk. Low income households with particular characteristics are likely to fare worse. This includes larger families; households in receipt of means-tested benefits (and those narrowly ineligible for means-tested benefits); households who rent their homes; disabled households; households with an unpaid carer; gypsy/travellers; rural and island households; single person households and single parent households. These low income households will face particular challenges as a result of reduced real term incomes and increased costs.

Certain groups are over-represented in these households, most notably minority ethnic groups and women. Minority ethnic households are more likely to have deeper levels of poverty and a greater proportion of their income is spent on essentials that are subject to inflation. Women are likely to experience indirect effects of cost pressures that are not always apparent in routine data. This can, for example, be due to formal or informal caring responsibilities and loss of income or career progression due to these caring responsibilities and divisions of domestic labour.

As new evidence emerges it will be important to re-examine evidence on those groups most affected. For example, mortgage interest rates have been rising, with particularly sharp increases in recent weeks. This means that home owners on variable rates and whose fixed rate deals expire may face very large increases in mortgage payments.

The UK Government response is insufficient to fully address the harms caused by the cost of living crisis.

To date several key interventions have been announced in 2022 by the UK government to help address the cost of living crisis. This includes a cost of living support package, an intervention on energy bills and a programme of support for businesses. These interventions have been notable for their scale. Collectively, they represent a very significant financial intervention.

Policies to address rising costs have also been introduced by other comparator countries. There are a range of examples of how governments have provided short term support to people through universal and targeted approaches. There are also emerging examples of how governments are introducing responses which attempt to realise longer term aspirations to improve energy efficiency and reduce reliance on Russian gas. Governments from some other countries were also comparatively quick to recognise the seriousness of the situation and introduce policy responses to address it with examples of responses being put in place from September 2021.

Despite the interventions put in place by the UK Government, some groups are considerably worse off due to their rising costs and reduced real-terms incomes. This risks increasing inequality.

Further concerted and targeted action will be required to support those people and sectors most negatively affected by the cost of living crisis.

Several research and policy organisations have argued that more targeted support is required than those associated with UK Government interventions to date. The 2022/23 PfG^[1] sets out how by the end of March 2023, the Scottish Government will have allocated almost £3 billion in measures that will help to mitigate the impact of the cost of living crisis on households. This package spans a range of support for energy bills, childcare, health and travel, as well as social security payments that are either not available anywhere else in the UK or are more generous.

The PfG also sets out a range of measures to support low income families. This includes confirmation that from November the Scottish Child Payment will increase to £25 per week per eligible child. The PfG also commits to double the Fuel Insecurity Fund to £20 million in order to help households at risk of self-disconnection or self-rationing of energy use and to provide local authorities with additional Discretionary Housing Payment funding. Help for tenants is also being provided through emergency legislation to protect tenants by freezing rents and imposing a moratorium on evictions until at least 31 March 2023.

While the actions outlined above will support households, businesses and organisations, the scale of the remaining challenge is substantial. There will be a need to take a longer term perspective that both provides support through this coming winter and builds Scotland's future economic and societal resilience in the years ahead.