A new definition of fuel poverty in Scotland: review of recent evidence

Chapter 6 Poverty, affordability and fuel poverty

6.1. Overview of poverty

The definition and measurement of poverty have long been controversial topics, (Mack, 2017), with major debates about:

• relative versus absolute poverty;
• how important is (current) income (as against other resources);
• whether one should root the definition of poverty in an objective/scientific frame;
• what role consensus should play in terms of definitions of material necessities and/or minimum standards.

There are also more technical issues about how to measure poverty and set thresholds, for example the treatment of housing costs or other committed expenditures, or the use of equivalence scales for household composition. Although apparently technical these questions raise issues of principle, for example about choice in the first instance or about need in the second (e.g. needs associated with age or disability).

We review these issues because this could help a new definition to encompass more fully emerging issues of hardship, inequality, and deprivation.

6.2. Should poverty be seen as relative or absolute?

Historically, poverty tended to be defined in absolute terms, usually referring to the basic essentials necessary for subsistence; this approach informed the classic early studies of poverty, such as the work of the Rowntrees, and also the foundations of the post-war welfare system established along the lines of the Beveridge report. But since the 1970s, a more relative concept of poverty has become predominant in the. This reflects in particular the work of Townsend (1979), who argued that the essence of poverty was being unable to participate in the normal life of the community to which you belonged. Townsend sought to show that this state could be measured through identifying specific indicators of deprivation, and that there was a clear threshold between having enough income to avoid this state, and falling into it.

The argument that poverty is therefore relative, and has to be defined in the context of a particular society in a particular period, has gained widespread acceptance. This can be seen directly in the poverty targets which UK and Scottish governments have followed since the late 1990s, which are expressed in terms of incomes below a certain threshold (60% of the median).

6.3. Is poverty the same as low income?

To be concerned about poverty is to be concerned about the resources which households have to meet their needs. Income is one of these resources, but not the only one. Savings, financial investments, and housing can significantly affect a household's ability to ride out temporary or even extended income shortfalls. In addition to these kinds of capital, households may have human capital i.e. skills that can make them self-reliant, or which can be sold/exchanged. Another form of capital is social capital - the networks of relationships where people (relatives, friends, neighbours) provide informal help in kind, loans and gifts. Access to services provided by local government and other public or voluntary bodies are also part of the resources which people may draw upon, and as with all these resources, people differ in terms of how successful their efforts might be.

A key part of the contribution Townsend and colleagues made was to identify a range of material (and social) deprivations which could act as indicators of real hardship. These, they claimed, better reflected poverty than income alone.

Subsequent research including the Poverty and Social Exclusion ( PSE) Surveys generally confirm that poverty measured using material deprivations tends to be more strongly related to a range of adverse outcomes, as well as to people's personal experience of living in poverty, than does income alone.

An even broader approach to poverty is the 'human capabilities' approach, first developed by Sen (1992). The central focus is on functional capabilities, not just on what people consume but on a wider vision of what they can do and be over a lifetime. Clearly, some of the ideas and insights of the approach are relevant. If somebody's home is hard to heat then that reduces the scope of what they can do within it, or reduces their household budget available for other things, or potentially undermines their health and wellbeing, affecting their wider life possibilities and choices.

6.4 What does poverty mean when ordinary people define it? The PSE metric

The idea of consensus has become important in thinking about poverty, in this case consensus about what constitute the basic necessities of life. Consensus does not mean unanimity, but it does mean clear, stable majority support for certain value judgements in a society. In the context of poverty, a set of goods, services, and social activities can become indicators of acceptable living standards provided a clear majority of people agree these are necessities.

In the UK, the Poverty and Social Exclusion ( PSE) study of 2012 is a good example of this approach (Bailey & Bramley, 2017). Large samples were asked to rate potential indicators in terms of how essential they thought they were. Over repeated scoping, a 23-item list eventually emerged as the consensual view of what material deprivation consisted of. Notably, people of all ages, cultural backgrounds and genders showed a strong consensus in rating whether items were essential to a decent life or not, and this applied whether groups were surveyed in England, Wales, Scotland or Northern Ireland.

The two items deemed most essential (with 94-95% of participants agreeing that they are essential), were:

• heating to keep the home adequately warm; and
• being able to live in a damp-free home.

The fact that 2 of 23 material deprivation items directly reflect some of the consequences of fuel poverty highlights fuel poverty's rightful place in debates about poverty, hardship and material deprivation.

6.5 What is the threshold of poverty? The Minimum Income Standard metric.

While the PSE represents one key approach to poverty, the other is the Minimum Income Standard ( MIS). This attempts to define a minimum acceptable household budget for different types of household. The MIS also draws on the experience and opinions of ordinary people. A final list of essentials for decent living are gathered and this 'basket of goods' is then costed at any one point in time, to yield a threshold or 'tipping point' below which people can be considered poor.

That threshold tends to be higher than the income levels applied to assess people's eligibility for welfare benefits in the UK, particularly for working age households and single adults. Partly for that reason, many recommend that the threshold is lowered somewhat when using MIS. For example, if MIS generates a minimum income of £500 a month, below which a single adult would experience deprivation, then a more conservative approach would conventionally set the threshold at 90% of that (£450 per month), or perhaps at 80% (£400). In this way, if one wishes to be reasonably confident when stating that 'anyone below this income line is likely to have a much greater risk of deprivation than anyone above it', then it is advisable to select a figure which is below 100%, of the full MIS (see Hirsch et al., 2016).

6.6. Responses to housing and energy affordability problems

Consideration of the way that households may respond to energy affordability problems suggests that the analogy with housing affordability is quite strong.

Table 6.1 summarises possible responses to problems of housing affordability and fuel affordability (derived from Bramley, 2012). The significance of these responses is that they provide a list of potential 'adverse outcomes' which are of concern and may result from fuel poverty. As such they may provide measures for assessing the extent to which different definitions of fuel poverty capture the adverse outcomes of living in fuel poverty. This is discussed further in the next Chapter.

Table 6.1.: Responses to affordability problems in relation to housing and fuel.

Housing Affordability (or Housing-Induced Poverty) Problem	Fuel Poverty Problem
Move/ trade down	Move to more fuel-efficient home
Housing costs 'committed' so little scope for reducing without moving which can be impractical and/or costly both financially and personally	Reduce fuel use with possible adverse impacts on health, wellbeing and condition of home
Material hardship - risks to social outcomes	Reduce spending on food/other essentials
Move into or tolerate a housing need e.g. crowding	Move to smaller home or share with others
Spend savings, increase debt (risk default, financial exclusion)	Get into debt on utility or other bills
Rent/mortgage arrears risking loss of home	Fall behind on housing payments, risking loss of home
Apply for social housing or subsidy (e.g. Housing Benefit)	Apply for social housing or subsidy (for energy efficiency improvement)
Household dissolves	Less likely solely as consequence of fuel poverty

6.7. The definition of income in the context of fuel poverty

There are different ways to calculate income when analysing fuel poverty. The traditional Boardman measure uses net household income 'before housing costs' ( BHC) as the denominator for its ratio. By contrast, Hills' LIHC measure uses net household income 'after housing costs' ( AHC) and 'equivalised' for different household composition. We would argue, in line with the predominant view from the poverty research field, that it is better to use income after housing costs ( AHC). This is because housing costs are a fixed commitment, given where a household is living, and are very variable between different individuals, groups, regions and stages in the life cycle.

This supports the argument that it is the residual income after housing costs against which the affordability of fuel costs should be assessed.

This conclusion is further reinforced by a good deal of evidence from the analysis of surveys like the PSE, such as the finding that income poverty AHC is more strongly related to a range of adverse outcomes (e.g. poor health, subjective poverty, financial difficulties, material deprivations) than the equivalent BHC measure. One of the key factors here is that some households have negligible housing costs because they are outright home owners. Use of AHC income gives a fairer picture of this situation than the traditional BHC measure. Scottish Government is changing the emphasis in its poverty targets to the AHC measure (e.g. the 2017 Child Poverty (Scotland) Bill).

It is also desirable when comparing incomes of different household groups to apply some equivalisation factors to adjust for different size and composition of households. The standard factors used in most government analyses are derived from the 'modified OECD' scale, which is relatively simplistic. Using MIS instead introduces a different equivalisation scale, in which families with children and households where someone is disabled are deemed to need more income to meet their non-housing living costs. This is relevant to the issue of fuel poverty because current methods for estimating household income in Scotland classify benefits paid to people on the basis of a disability as income, rather than as a supplementary payment needed to cover the additional costs associated with their disability. Studies have shown the extent to which this excludes many people living with a disability from being considered fuel poor, simply on the basis of their having an income boosted to cover their extra needs (Snell, Bevan & Thomson, 2015).

6.8. Summary

This Chapter has outlined the Panel's thinking on how poverty should be defined when estimating fuel poverty prevalence in Scotland. We supported using residual income after housing costs, equivalised according to household type, and in a manner which takes account of additional needs (for example needs related to the presence of children or living with a disability). These are all considered important components. Furthermore, a poverty threshold based on a Minimum Income Standard is deemed to be most suitable, with a conservative approach reflected in a threshold lower than 100% MIS.

Key Conclusions on poverty and affordability

While low income (relative to that of others in the same society) provides a starting point, the whole evolution of conceptual thinking about poverty leads towards a definition of poverty based more on consensual deprivation approaches which focus on societal norms about what people need and should not have to do without. Good candidates for measuring poverty are, therefore: the consensual material deprivation index approach exemplified by PSE and the Minimum Income Standards ( MIS) approach to setting household budgets.

However, for practical reasons to do with the availability of suitable survey data, the second of these ( MIS) is likely to be the front runner for implementation.

We believe that there may be merit in combining measures based on residual income with ratio measures, and that in general income should be measured after housing costs.

Consideration of the ways in which households may respond to situations of fuel poverty, some of which are similar to responses to problems of housing unaffordability, suggest a number of possible adverse outcomes. These might be a basis for investigating the relative effectiveness of particular fuel poverty measures in highlighting the pressing 'hardship' problems that policy and practice ought to be most concerned with.