Negative Budgets: A new perspective on poverty and household finances
People often think that problem debt is the result of overspending, such as big credit card bills and bad money management. That story doesn’t ring true for the people at Citizens Advice who help families manage their debts on a daily basis.
Increasingly, advisers are helping people who simply don’t have enough money to meet their key living costs. Since 2016, the proportion of people Citizens Advice helps with debt, who have negative budgets has grown from under a third (32%) to nearly 2 in 5 (38%).
A negative budget is where a debt adviser assesses that a client cannot meet their living costs. To do that, they use a tool called the Standard Financial Statement (SFS).
The SFS is agreed between debt advice and financial service providers. It enables advisers to build a detailed budget, recording levels and types of income, fixed costs such as rent, and flexible costs such as food. Guidelines are set to inform how much people should spend in each category and it doesn’t include any unsecured debt repayments. When someone has £0 or less after their expenditure they are considered to have a ‘negative budget’.
Who is in a negative budget?
The data collected by debt advisers using the SFS is unique. It provides a rich insight into the challenges faced by people in debt. Our analysis shows that as well as becoming more common:
The depth of people’s negative budgets has increased. In 2016/17 the average negative budget was £167. In 2018/19 it was £203. This means that on average, those struggling with a negative budget had £203 more going out than they had coming in as income that month.
Large numbers of people we help are close to falling into a negative budget. Meaning nearly 4 in 5 have less than £100 a month after living costs.
People we help with negative budgets are more likely to be women, disabled people, and people with a long-term health condition.
Why do people have a negative budget?
The causes of negative budgets are incredibly complex. But at a simple level, there are two reasons - a low income and high household costs.
Looking first at income, many people with negative budgets are in work, with over a quarter (28%) in full time work. However, on average their income is lower than people with a positive budget.
One stark finding is the impact of the benefits freeze. From April to August 2019, 4 in 10 (40%) people we help with debt who claim income-related benefits don’t have enough money to cover their costs. This is up from 32% in 2016/17. In comparison, the proportion of households with a negative budget who don’t claim these benefits has remained largely unchanged. For further information about the people we help with debt and the impact of the benefits freeze, see Citizens Advice (2020), Making Ends Meet: The impact of the benefits freeze on people in debt.
On the expenditure side, two findings stand out.
First, people with negative budgets don’t overspend. They spend very similar amounts to people with positive budgets.
Second, due to low incomes, they spend a very high proportion of their incomes on fixed expenditure. People with negative budgets spend an average of 90% of their income on fixed outgoings compared to 62% for those who have a positive budget.
What should be done?
In reality, people can’t have a negative budget for long. They can’t spend money they don’t have. Instead people with negative budgets fall behind on household bills - into rent or council tax arrears - they struggle to repay debts they already owe, and they are forced to go without essentials.
Policymakers interested in improving living standards have two places to look. They can increase incomes or help reduce key living costs for those who are struggling. Over the coming months we’ll be looking at how they should respond. Initially, one change would help. The government should end, and start to reverse, the impact of the benefits freeze by uprating frozen benefits by the Consumer Prices Index (CPI) plus 2% for 4 years.