As mayor of Greater Manchester, Andy Burnham’s approach to governance, from bus franchising to housing and homelessness efforts, was to intervene where markets failed to deliver fair outcomes. If he becomes prime minister – as widely expected – I hope his response will be similar in tackling another marketing failure: the entrenched ‘poverty premium’.
The ‘poverty premium’, the extra cost low-income families face when trying to access life’s essentials, means people on low incomes spend an extra £380 each year on household bills such as energy, insurance, food and credit. Recent research from the charity I run, Fair By Design, found that 95 per cent of low-income households pay at least one of these premiums – equating to approximately 6 million households. One in four households pay an extra £505 each year and one in ten £736, our findings show.
To be clear: these are not the additional costs we all face due to inflation. This is an additional burden on top of inflation that low-income families face every day.
The poverty premium exists because people with lower incomes have fewer opportunities. Where wealth brings flexibility: to pass, to pay in advance, to absorb shocks. Low income brings restrictions.
This limitation manifests differently in families. A single parent without a car is more likely to rely on expensive local grocery stores. A private tenant may struggle to change energy rates or improve the energy efficiency of their accommodation. Older households or those without reliable internet access may be completely shut out of digital deals. White resident households are less likely to experience poverty premiums than any other ethnicity, our research found.
It’s ten years since the University of Bristol – which works with us on this issue – first measured the poverty premium and has had some successes over the last decade. But this latest report shows that the poverty premium is rising and that bolder action is needed.
Food is now the single largest driver of the poverty premium. This is caused by the rising cost of food, the widening price gap between larger and local versions of supermarkets and households doing more of their shopping at these more expensive local stores. Insurance remains, and has consistently been, the most expensive poverty premium. Paying monthly instead of annually, living in a higher-risk postcode, or relying on single-item coverage all increase the cost of protection.
Energy, too, tells a new story. During the height of the energy crisis, the focus was on extreme prices that affected everyone. For the brief moment that wholesale costs eased and cheaper flat rates returned—and before the war between Iran and the US—disparities in access to the best rates reappeared. Those who pay for their energy after receiving the bill, rather than direct debit, also face an ongoing standard credit premium, paying more for the same energy.
Unsurprisingly, digital exclusion is becoming a more powerful cost determinant. Most of the best deals are accessed online, require active switching, or depend on navigation with complex rates. For families without reliable Internet access or the time and confidence to engage, risk is not only occasionally missed, but systematically excluded.
In any case, the issue is not simply the price. It’s access.
During the last decade there have been significant interventions. The energy price cap, action on high-cost credit and the Financial Conduct Authority’s Consumer Duty and work on premium financing have all helped to soften some of the sharper edges of the system.
But these interventions are limited because they treat the symptoms and not the causes. They prevent the worst outcomes while leaving intact the underlying dynamics that produce them.
This matters politically because it challenges an assumption that shapes the way markets work: that markets, if left broadly intact, will produce fair outcomes. They don’t.
In practice, we need to move towards a model of “default justice”. This means moving beyond a model that assumes justice will emerge if consumers are simply equipped to navigate markets more effectively. For many families, this premise does not hold.
Applied to energy, this could mean getting rid of the premium payment method or going even bolder and introducing a social energy tariff. In insurance, it could mean reconsidering how risk-based pricing interacts with the deductible and whether monthly and annual payers should pay the same for the same level of coverage. It could include a renewed push for affordable credit, including scaling up interest-free credit schemes and placing stronger obligations on mainstream lenders to serve excluded groups.
None of this is without tension. Intervention in pricing structures raises questions about distortion, cross-subsidization and cost. But these questions already exist; they are simply chosen, currently, in ways that disadvantage those who are already struggling to make ends meet.
We hope that a Burnham-era Labor Party is likely to be clearer about this trade-off. He would not abandon competition, but neither would he treat it as an end in itself. The test would be whether essential services work for people, not the other way around. Will a Burnham-led Labor be willing to question who our economy is designed to work for?
The poverty premium has not only increased, but is becoming more deeply embedded in the way everyday markets work.
If we are serious about economic justice, it will have to go beyond protecting consumers from the worst harms. An economy where those with less consistently pay more is a product of design. And that means it can be redesigned – if there is the political will to do so.
