Cost of Living (Tenant Protection) (Scotland) Act 2022 - 2nd proposed extension: statement of reasons

4. Updated Economic Context

4.1 The ongoing cost crisis continues to place people across Scotland in a precarious economic position. Renters, in particular, have lower household incomes, higher levels of poverty and are more vulnerable to economic shocks.^[3] Over the period from 2018-2020, 63% of social rented households and 40% of private rented households did not have enough savings to cover even a month of income at the poverty line, compared to 24% of households buying with a mortgage and 9% of households owning outright. Thus rented sector households entered the cost of living crisis in a more vulnerable position than owner occupiers.

4.2 The latest Understanding Scotland: Economy report^[4] published in February 2023 found that two-thirds (63%) of Scots surveyed believe that their own personal financial situation has worsened in the last 12 months. A significant proportion of respondents also reported experiencing financial fragility: 25% reported that they were not confident they would be able to pay for an emergency expense of £100 without having to take out a loan or borrow money, rising to 45% for an emergency expense of £500.

4.3 According to recent YouGov polling for the Scottish Government^[5], in late March 2023, levels of concern about paying mortgage/rent were twice as high in the private rented sector than across all tenures as a whole (22% for private renters compared to 11% for all tenures).^[6] Private renters were also more likely to say that they were struggling to pay for household bills, including energy bills and rent at least a little^[7] and that they were managing less well financially^[8] (30% of private renters compared to 22% all tenures as a whole). There has been no significant improvement in these figures since November 2022. In March 2023, a majority of private renters (63%) reported that their mental health had been impacted negatively by the cost of living.^[9]

4.4 The conclusion drawn from these qualitative surveys that the economic position has not yet changed fundamentally and many households on low and modest incomes continue to struggle is supported by the latest economic data. People are facing increased costs across the board, and the biggest impact is felt by those on the lowest incomes: the Office for National Statistics estimates that inflation for low-income households was 11.3% in December 2022, as compared with 10.0% for high-income households and 10.5% for all households.^[10]

4.5 A comprehensive overview of the latest economic situation was provided in the first report to the Scottish Parliament published on 12 January 2022,^[11] and a further update on key indicators is provided below:^[12]

• It is estimated that the fuel poverty rate will have slightly decreased from 35% in October 2022 to 34% in July 2023, when the Ofgem energy price cap for the typical dual fuel household will be set at £2,074. Though the Energy Price Guarantee was set at £2,500 from October 2022 and the Ofgem energy price cap will be set at £2,074 from July to September 2023, representing a decrease of £426, the reason that estimated fuel poverty rates from July to September 2023 are similar to those for October 2022 to March 2023 is that during this period the £400 Energy Bills Support Scheme, paid to all households, was in place. This was withdrawn from April 2023. When compared to October 2022, it is estimated that in July 2023 the fuel poverty rate within the private rented sector will have slightly decreased from 48% to 47%. The fuel poverty rates in the social rented sector and for owner occupiers will also have slightly decreased by one percentage point. While the rate in the private rented sector (47%) will be somewhat lower than in the social rented sector (54%), it will be significantly higher than in the owner occupied sector (23%). This analysis shows that there has been little change in the pressures faced by households in all tenures since October 2022.
• Annual Consumer Price Index (CPI) inflation reached a peak of 11.1% in October 2022 (its highest rate since 1981), relative to the 9.9% recorded in August 2022 prior to the introduction of the emergency legislation. Since then it has moderated somewhat, declining to 8.7% in April 2023 due to the large increase in energy prices experienced in April 2022 now falling out of the comparison. Annual growth in the electricity, gas and other fuels component of the index remains high at 24.3%, even if this is down from the recent peak of 89.7%. Annual growth in the index for food and non-alcoholic beverages is also elevated, at 19.0% in April 2023, which, apart from the 19.1% recorded in March, is its highest rate since August 1977.^[13] Necessities such as food and energy typically form a larger component of low-income households' budgets. While annual CPI inflation is expected to continue to moderate over the course of 2023, it will remain significantly higher than the 2% inflation target, with the Bank of England projecting that it will average 8% in Q2 2023, 7% in Q3 2023, then 5% in each of Q4 2023 and Q1 2024.^[14]
• Increases in pay and earnings remain below inflation. For the 3-month period January 2022 to March 2023, annual growth in employees' median seasonally adjusted nominal total pay in Great Britain was 5.8%. Adjusting for inflation, real total pay fell by 3%, a similar fall to the previous three-month period, and among the largest falls recorded since comparable records began in 2001. The annual growth rate in median seasonally adjusted nominal pay in Scotland taken from HMRC PAYE records has increased from 4.8% in August 2022 to 8.6% in March 2023, lower than the level of CPI inflation in each month of this period, with the latest figure for April 2023 being 9.3%, although this is an early estimate and is likely to be subject to revision.
• While the decision by the UK Government to uprate reserved disability and low-income benefits by 10.1% (the inflation rate in September 2022) in 2023-34 will compensate benefit clients for the exceptionally high rate of inflation in 2022-23, they will again face elevated inflation in 2023-24. The UK Government has also decided to freeze Local Housing Allowance (LHA) rates, which apply in the private rented sector, at 2020 levels for the third year running.
• As a result of these trends, in their most recent set of forecasts (May 2023), the Scottish Fiscal Commission projects that over the two-year period from 2021-22 to 2023-24, households will see their real disposable income fall by a cumulative 4.1%, Scotland's highest fall in living standards on record.^[15]
• Latest data for Scotland from letting agents shows continuing high growth in rental prices, with Rightmove reporting an annual increase of 12.3%^[16] and Citylets an increase of 12.4% in Q1 2023,^[17] and Zoopla reporting an increase of 13.0%^[18] in January 2023. It should be noted that this data relates only to trends in new let rents, and thus do not show the impact of the rent controls for existing tenants. However, although some caveats apply to the data (letting agencies only cover around half of the private rented sector, and each letting agent's data will be affected by its market coverage, which varies by geography and market segment), this data does show that in the absence of legislation there is a high probability of substantial increases in rents for existing tenants, should their rents be increased to the market level.