The National Red Index 2025: negative budget households face a debt crisis like quicksand

Acknowledgements

This report was written by Nick Kardahji, with input and support from Sam Pelosi, Emer Sheehy, Julia Hamilton, Daniel Haigh and many others.

Executive summary

Mounting debt levels risk trapping some of the poorest households in England and Wales in perpetual hardship, unless the government acts now to offer targeted support. That is one of the key findings in our latest report on the National Red Index, a measure of the proportion of households in England and Wales who are in a negative budget - where their incomes are too low to cover the bare essentials each month. Our research shows that households in a negative budget have deep monthly deficits, potentially set to grow even deeper this year, which in turn is driving a rapid rise in household debt. 

For the people we support at Citizens Advice who are in a negative budget, debt levels reached new heights this year - just under £10,000 per household on average. This is self-evidently unsustainable for those whose income isn’t even meeting their basic costs. Worryingly, we also see that people in a negative budget have much higher debt levels than those who are able to make ends meet - just over £2,100 more debt on average. This gap has grown significantly since 2019 when it stood at less than £1,000, reflecting the fact that debt levels for negative budget households have been growing much faster. Without targeted intervention these households risk sinking deeper into debt, storing up even more complex and challenging problems for the future.

Our analysis underscores how prevalent negative budgets remain. We estimate that there were four million people in England and Wales in a negative budget in 2024/25, including 860,000 children. Families with children and private renters were particularly hard hit: 1-in-14 households with children, 1-in-9 private renters, and 1-in-7 single parent households were in a negative budget.[1] This is down slightly from the peak we saw at the height of the cost of living, but there is still a long road to travel to raise the living standards of the hardest hit households.[2]

On top of those unable to make ends meet, our research shines a light on a further 320,000 people who were on the cusp of crisis last year, within £50 a month of a negative budget. Our forecasts suggest this could increase to 580,000 people this year.[3] For those on the edge of a negative budget, one unexpected bill hike or a dip in income could quickly tip them into the red. In a climate of growing economic uncertainty, that should be ringing alarm bells in government. 

Labour came to power pledging to make raising living standards one of its central missions. This was a welcome change from the piecemeal approaches of the past and resonated with voters for whom the cost of living remains top of their list of concerns. But whilst the rhetoric has been positive, delivery has not always matched up with it. Rises in the minimum wage last April were an important positive step, boosting incomes for the lowest paid, but attempts to slash disability benefits risked taking us backwards. A renewed, laser-like focus on living standards is now critically urgent. 

To start getting to grips with the scale of the living standards challenge there are some immediate targeted actions we need to see in the upcoming Autumn Budget, to put money back in the pockets of the households our data shows are struggling most:

1. Scrap the two-child limit and benefit cap to stop the rise in child poverty and put money back into the pockets of struggling families

2. Uprate Local Housing Allowance to restore the link to the 30th percentile of local rents to boost the incomes of low-income private renters

3. A comprehensive and coherent set of social tariff schemes for essential utilities to shield low-income households, including rising numbers on the cusp of crisis, from future bill shocks

These measures are crucial first steps, but won’t be enough by themselves. A central insight from our data is that any easing of living standards pressures to date has been due to the fall in the headline rate of inflation and not because households have significantly more resources and are more resilient. What is needed longer term therefore is for the government to deliver on the promise of a true living standards strategy, one which pulls all the levers available to rebuild financial resilience for struggling households. 

If the government is prepared to be bold and ambitious we can properly insulate families from future economic shocks and ensure that everyone can benefit from higher economic growth. The alternative is to risk leaving millions of people to fall further behind, trapped in negative budgets, and sinking deeper into debts they cannot escape from.

What is the National Red Index?

At Citizens Advice, we provide specialist debt support to around 80,000 people each year.[4] As part of that process we go through a budget planner exercise, recording their income and expenditure in detail. Our specialist advisers then work with them to set a minimum, sustainable budget. But, even after going through this process, more than half still have essential costs that exceed their income. We call this a negative budget.

A negative budget is the ultimate red line between getting by, and being dragged further into hardship. We think this is a more realistic insight into what people need to get by than existing living standards metrics, because it’s grounded in real experiences. It’s the outcome of real people at the sharp end of the squeeze on living standards determining - with the help of an experienced debt adviser - what a minimal but sustainable budget looks like for them. The negative budget rate allows us to focus on the households facing the most severe financial hardship and see, in detail, what is driving that.

But we know that the waiting room of a local Citizens Advice office is not like the country as a whole - people come to us because they’re in trouble, and need support and advice. So, to build a representative picture we combine our internal client data with data from the nationally-representative Living Costs and Food Survey produced by the Office for National Statistics (ONS). This contains detailed information on household spending and allows us to model what the rate of negative budgets looks like for the population of England and Wales as a whole. We call this data set the National Red Index.[5]

How the National Red Index reveals the scale of the living standards crisis

The headline rate of negative budgets peaked in 2023/24 when inflation and energy costs spiked. Since then, there has been a slight dip, but the rate remains well above levels seen five years ago. Last year, there were 1.7 million households in a negative budget. This is equivalent to 4 million people, of whom 860,000 are children.[6]

There were a further 320,000 people who were within £50 a month of a negative budget. This means, in total, 1-in-14 people in England and Wales were living in households that were either in a negative budget, or £50 away from one.

People on the cusp of a negative budget are highly vulnerable to further cost-of-living shocks. Even a relatively small increase in food, energy or housing costs, or a loss of employment or benefit income, would wipe out the small buffer these households currently have, and plunge them into crisis. Given the uncertainty about the economic outlook, coupled with the stubborn picture on inflation, this should greatly worry the government. Building resilience to prevent these people falling into a negative budget should be a top priority in the Budget. 

We also know that those already in a negative budget are facing extreme financial challenges. On average, households in a negative budget had a monthly deficit (the gap between their income and their essential costs) of -£343 in 2024/25. For millions of people, large deficits mean falling further behind on essential bills and sinking deeper into debt. 

This is especially true given that we are several years into this living standards crisis, so some households will have been stuck in a negative budget for some time. This means they are likely to have already accumulated significant levels of debt. So, although the topline negative budget rate may be down slightly, for the people living with the reality of a negative budget their situation is becoming increasingly dire. Without urgent, targeted support to put money back into their pockets, this risks becoming a trap that households in a negative budget are unable to climb back out of. 

Our own debt advice data adds fuel to that concern. Of the 80,000 people a year we provide specialist debt advice to, currently more than half are in a negative budget. For this group, debt levels have been continuing to climb, averaging just under £10,000 per household for 2025 so far, a 24% increase since 2019. This is a much faster rise than for those not in a negative budget whose average debts are up 11% since 2019.[7] As a result, the gap between the average debt levels of those in a negative budget and those not has more than doubled in the last six years. For people in a negative budget, debt levels like these are self-evidently unsustainable for households who don’t have enough coming in to cover their essentials, let alone a surplus to start paying back debts. 

This fundamentally impacts the kind of support we can offer these households. For people who are still facing a deficit, even after working with our specialist advisers to cut back their spending to the bare minimum, there are no good options left. For many, the only choice is to cut back more than they should on essentials like food and heating, and to rely on crisis support to get by. This is part of what has driven the rapid increase we’ve seen in demand for charitable support and food banks. We are currently helping more than 20,000 people a month with crisis support of this kind.

Which households are facing the greatest pressures?

The decline in living standards has impacted everyone to a degree, but two groups in particular face acute financial pressures as a result of rising costs and pressure on incomes. The government should focus on these two groups as a priority if it is to alleviate pressure on public services and raise living standards in every region. 

Households with children

The negative budget rate for households with children, and particularly single parent households, is already higher than for households without children. We estimate that last year there were more than 860,000 children living in households in a negative budget in England and Wales. 

This reflects the rising level of child poverty across the country, and the devastating impact that policies like the two-child limit and benefit cap have had on children. Unless action is taken, the picture is set to get worse. The design of the two-child limit means that it will push more and more children into poverty over the coming years.

This is why scrapping the two-child limit, and the benefit cap (which also disproportionately impacts children) is so important. Partially lifting the limit - for example to create a 3 or 4 child limit, or to exempt working parents from the policy - would only create a narrower group who are at even higher risk of hardship. It also builds in further precarity into the system, as any working parents who lose their job would at the same time lose the additional support for their children.

What is striking is how financially constrained low income households with children are. These households face a limit on how much work they can do because of their caring responsibilities, leaving them with few options to increase their income beyond what the benefit system provides. At the same time, having children limits their ability to reduce consumption of essentials like water and energy. This means that even relatively small rises in these bills can push their finances to breaking point. This is why action to insulate these households from volatile bills, via a comprehensive social tariff scheme, is so important.

Private renters

Last year, the negative budget rate for all households was 6.9%, but for private renters it was two-thirds higher - 11.3%. A key driver of negative budgets for this group is the rapid rise in the cost of renting in the private sector. This has far outpaced Local Housing Allowance (the amount of Universal Credit people can receive to help with rent costs). Data from people we help with debt shows this clearly: the negative budget rate for private renters receiving Universal Credit (and therefore likely to be receiving LHA) is higher than for other renters.[8] 

For renters, especially those in the private sector, the high (and rising) cost of rents eat up so much of their income that there is very little room for manoeuvre if other costs increase. While the reforms in the Renters Rights Bill are welcome and essential, and will address many key issues in the private rental market, they do little to directly tackle rental affordability. There is therefore a need for government action to fill that gap. 

What is the outlook for 2025/26?

So, if the picture was grim last year, what does this year hold? Our modelling suggests a mixed picture. We are forecasting that the headline rate of negative budgets may fall slightly, meaning around 200,000 people could move out of a negative budget this year. This is clearly positive, but needs to be seen in the context of the peak reached at the height of the cost of living crisis: even if this fall does occur, there will still be almost 330,000 more people in a negative budget in 2025/26 than there were in 2019/20.  This accords with our debt advice data which shows the negative budget rate for people we help with debt advice is still well above pre-pandemic levels.

Worryingly, we are also projecting that the number of people within £50 a month of a negative budget is set to jump by 80% to around 580,000 people. In other words, whilst some may see a small easing of financial pressures, in many cases it is likely that people who were in a negative budget are moving just over the line into a small surplus. Moving out of the red is clearly positive, but the small size of the surplus provides very little buffer against future shocks and leaves those households just one unexpected bill away from being back in the red.

For those households who remain in a negative budget, our forecast suggests a worsening picture too. The average monthly deficit for negative budget households could deepen by 15% to -£396. This shows that the gap between households who are managing financially, and those in a negative budget could be growing. This should be a big source of concern for policymakers. There is a growing risk that millions of people sinking deeper into crisis could be left further behind by any future economic upturn.

A very important caveat for these figures is that they are projections. We based our analysis for the 2025/26 financial year on forecasts for inflation: if those forecasts turn out to be too optimistic, then the outlook for the National Red Index will be worse than the numbers above suggest. There are already signs that inflation is proving to be more sticky than forecasters thought, and for some important costs, like food, inflation is growing rapidly again. If this trend continues over the rest of this year then an already troubling picture could start to look a lot worse. This is why action in the Autumn Budget to get money back into people’s pockets is so important.

What is driving the change in the rate?

The fact that the negative budget rate fell slightly in 2024/25 is clearly very welcome. But the factors driving this suggest further grounds for concern about the resilience of household finances. Our analysis shows that the fall was driven much more by costs falling or growing less quickly, than by income changes. At the peak of the cost of living crisis, for example, spending on utilities (driven by energy bills in particular) rose by 50%. But, as energy bills dropped from their extreme highs, spending on utilities fell slightly in 2024/25. Similarly, other important cost categories like housing and food grew much more slowly last year than in previous years. 

This underscores one of the central insights provided by our data. The big rise in the negative budget rate that started in 2021/22 was driven by a rapid rise in inflation. But, crucially, this came on the back of years of historically weak pay growth and benefit freezes. This big squeeze on incomes left households, especially those at the bottom of the income range, especially vulnerable to a rapid, unexpected rise in costs.  

Policymakers must be alive to this fact and recognise how far financial resilience has been seriously eroded for low income households. This is why action to tackle negative budgets must include measures to boost incomes as well as steps to insulate vulnerable households from bill shocks via a comprehensive social tariff scheme. Above all, government must recognise that it is not enough to simply wait for inflation to subside - even if this helps some households escape the immediate crisis, it does nothing to protect them from the next one.

One clear example of how impactful boosting incomes would be was provided during the COVID pandemic.  In April 2020 the government introduced a temporary £20 a week uplift to Universal Credit, ultimately removed in October 2021. This significant boost to benefit income is likely a major reason why negative budget rates fell sharply in the 2020/21 financial year. For households in receipt of Universal Credit, the negative budget rate fell by 25%, while for disabled households it fell by more than 40%.

The big positive impact that the UC uplift had on negative budget rates for disabled households reflects the greater reliance those households have on benefit income. The health and care needs of disabled households place a limit on their ability to boost their incomes by other means, for example by working more. This is of course what the benefit system was originally designed to do - support the incomes of vulnerable, low income households. The removal of the UC uplift coincided with the huge rise in inflation, a double hit to household finances. By 2023/24, the negative budget rate had rebounded sharply, leaving 1-in-9 disabled households in a negative budget.

For households that do have employment income this greatly reduces the risk of negative budgets; whilst 36.5% of unemployed households are estimated to be in a negative budget, the negative budget rate for those in work is much lower at 4.5%.  Nevertheless, this doesn’t mean we should be complacent about the financial pressures facing people in work, or assume that work is a silver bullet for raising living standards. 

Although the headline negative budget rate for people in-work is lower, because most people are in some form of work, that rate still translates to a large number of people, more than 1.6 million in 2024/25. And, of all the households in a negative budget last year, more than 40% of them included someone in work. The government is taking some steps on this (for example, continuing to increase the National Minimum Wage, and the planned reforms in the Employment Rights Bill), but in-work poverty remains a huge issue that needs much more concerted attention.

The fact that the root issue of low financial resilience has not been addressed should be a further source of worry to policymakers. The picture our data paints is very much one where the worst of the cost of living shocks have eased, and not one where households have more resources and are therefore more resilient. In a context where the cost of food is rising sharply once again, and big rises in other areas like water bills are also forecast, households finances could easily be plunged into crisis once again. The International Monetary Fund is also now forecasting that UK inflation will be higher than other major economies this year and next, driven in particular by rising energy and utility bills.  Action to bolster incomes and protect the poorest and most vulnerable is therefore critical.

How government can use the Budget to start to turn the tide on living standards

The government has put raising living standards high on their priority list but our data suggests, so far, they have not done nearly enough to deliver action that is actually felt in people’s pockets. So what can they do to start turning the tide on living standards, particularly for those households trapped in a negative budget? Well, there are several immediate steps that the government can take in the Autumn Budget to start supporting the hardest hit families. 

1. Firstly, scrapping the two-child limit and the benefit cap would remove one of the biggest drivers of child poverty and do much to boost the incomes of struggling families with children. We have argued before that reversing these two policies in their entirety would be the most efficient way to reduce child poverty, and scrapping the two-child limit alone would lift half a million children out of poverty. This should be accompanied by a comprehensive child poverty strategy that tackles the wider drivers pushing families into hardship.

2. Secondly, action is urgently needed to support low-income private renters who, as we’ve seen, are being hit hard - we estimate more than 1-in-9 private renters in England and Wales were in a negative budget in 2024/25. The high cost of private rented accommodation is a major driver of this - private renters in a negative budget spend almost two-thirds of their income on rent - and the gap between rent costs and Local Housing Allowance that is driving hardship for many. To tackle this the government needs to restore the link between the support people can get with rent,  and the actual cost of renting by reattaching LHA to the 30th percentile of local rent costs. This would do much to boost the incomes of the hardest hit renters and allow many to escape a negative budget.

3. Thirdly, targeted bill support for essential utilities would cut costs and shield the poorest households from future bill shocks. With 580,000 people forecast to be within £50 a month of a negative budget in the 2025/26 financial year, even a relatively small rise in bills would quickly drive those households closer to the red. But, with a comprehensive and coherent set of social tariff schemes across essential markets, we can guard against this and insulate the most vulnerable from this type of cost pressure. This is particularly important in the water market where bills have been rising rapidly this year, up to 47% in some parts of the country.

Beyond the Budget - a living standards strategy

These measures would provide immediate targeted support to some of the hardest hit households. But the government needs to think bigger than this if they are to achieve the ambition of ensuring people have genuine resilience in their finances, and are not just holding on until the next crisis or bill hike takes them back over the edge. What’s needed is a holistic approach to policy-making - which recognises the complexity of people’s lives, and how policy decisions will play out and interact with each other. Above all we need more than sticking plaster solutions - we need a comprehensive living standards strategy that tackles the root causes of negative budgets.

On the income side, we need to start restoring the link between benefits and the true cost of living. At the moment, the government uses CPI inflation to uprate benefits, but this approach is flawed as it doesn’t properly capture the actual cost increases households face. Working age people who receive benefits have been hit hard by this over the last decade. We previously calculated that if benefits had instead been uprated using a better measure of inflation, the Household Cost Indices, Universal Credit payments for a typical family of four would have been £121 per month higher by the 2024/25 financial year.[9]

More also needs to be done to boost the incomes of those in work. Increases to the minimum wage are a positive step, but earnings from work are still too low to make ends meet for too many households: 41% of households in a negative budget in 2024/25 included someone in work. Part of the issue is the widespread use of insecure forms of work and lax enforcement of employment rights. Hundreds of thousands of workers are being wrongly denied the minimum wage, statutory sick pay or paid holidays, whilst millions more face discrimination at work that in some cases leads them to receive less pay than they should. 

The reforms in the Employment Rights Bill are a welcome step forward, especially the establishment of a single enforcement body for labour rights, the new Fair Work Agency. This is long over-due and something Citizens Advice have long been calling for. But, there is still a long road to travel to shift the landscape towards better enforcement of rights in the workplace, and the Fair Work Agency needs proper funding and a clear mandate to proactively tackle abuses in the labour market.

On the expenditure side as well, more action is needed. The measures we’ve outlined above on LHA and social tariffs will be essential, but not enough by themselves -  the government needs to think boldly and ambitiously about how to better insulate the poorest households from future rises in the costs of housing and utilities, which together account for almost three quarters of the income of private renter households trapped in a negative budget. Low-income households with children, and disabled households, also need better targeted support to help them with the extra costs they face. 

Turning the tide on living standards will not be straightforward and needs bold, joined-up thinking to deliver real change. But, with too many households mired in a negative budget, and many more perched on the edge of crisis, the time for action is long past - the government must pull all the levers it has available if it is to avoid presiding over a deepening living standards catastrophe. 

Endnotes

[1] In 2024/25, we estimate 7.1% of households with children were in a negative budget, 11.3% of private renters, and 13.7% of single parent households

[2] We previously reported on the National Red Index in early 2024. The numbers in our new report are slightly different because we are not including Scotland this time, and because we have been able to update projections for previous years with actual inflation and expenditure data. This has led to some relatively small revisions to negative budget estimates for the years 2019/20 to 2023/24, though the overall trend in the data remains the same.

[3] As we note later in the report, the projection for 2025/26 is based on forecasts for inflation and earnings which may prove optimistic. Inflation is already higher than forecasts produced earlier this year predicted. If that proves true for the year as a whole, then our forecast will likely be an underestimate.

[4] Citizens Advice helps more than 400,000 people every year with debt advice. Of those people, around 80,000 go through an in-depth budget planner exercise with our specialist debt advisers.

[5] The National Red Index uses a combination of expenditure data from Citizens Advice debt clients, and income and expenditure data from the Office for National Statistics’ Living Costs and Food Survey (LCFS), to establish how many people across England and Wales are in a negative budget. Specifically, we take the average spent by our debt clients (after they’ve been helped by an expert adviser to cut down their spending) on flexible costs - things like food, clothing and groceries which you can cut back on if your finances are squeezed - and combine it with people’s fixed costs from the LCFS - things like rent and council tax that are hard to change. The calculations for 2019/20, 2020/21, 2021/22, and 2022/23 are based on real data from our clients and the LCFS.  To create a dataset for 2023/24, 2024/25, and the current financial year, for which LCFS data was not yet available, we have taken the real data for 2021/22 and 2022/23 and adjusted it by inflation, using the Household Cost Indices (HCIs) and the Consumer Price Index inflation (CPI). 

[6] We use official census and other population data from the Office for National Statistics to determine average household size and then use that to convert numbers of households into numbers of people.

[7] These figures are calculated from the data we collect on income, expenditure and debt levels from the people who come to see us with debt problems. The percentage increase is the change in the average level of debt of the people we saw in 2019, compared with this year (January to September).

[8]  We do not directly record in our data whether people are in receipt of Local Housing Allowance, so we have used private renters in receipt of Universal Credit as a proxy.

[9] The Household Cost Indices (HCIs) offer a more accurate measure for low income households because they include costs excluded by CPI, weight households more equally, and take into account the share of income spent on different things. Most living standards analyses use the Consumer Price Index (CPI) inflation rate.