IF’s new report “Blowing the Budget: Why the young have to spend more than the old on Essentials” has just been published. The report’s author and IF researcher, Toby Whelton, talks us through the key findings of the report and what it tells us about the financial pressures facing young people.
The cost of being a young person
In many ways, the cost-of-living crisis has been an economy-wide phenomena that has affected all households. However, IF’s latest report, Blowing the Budget, examines whether different ages and generations have had different experiences of the cost-of-living crisis.
The report looks at consumption patterns across different age groups and how they compare to twenty years ago. The goal was to quantify some of the budgetary pressures and challenges young people are currently facing.
Are young people struggling because they are spending too much on smashed avocado toast and flat whites, or is it because they face harsh economic circumstances not seen by older generations?
The young people’s premium
Our findings show that young people are facing greater costs than any other age group, effectively having to pay a “young people’s premium”. Under-30s must pay nearly double (84% more) than over-65s to afford the same minimum standard of essentials.
Households under 30 years of age on average spend 70% of their total budget on essentials, while over-65s spend just 56% of their total budget on essentials. For 30−49 year-olds this figure is 64% and 50−64 year-olds this figure is 59%.
Perhaps most alarming is the fact that the poorest fifth of young households are currently dedicating 77% of their expenditure to essentials alone. This is 21% more of their budget compared to twenty years ago.
Economic theory states that households having to spend a high proportion of their budget on essentials is indicative of low living standards and low disposable income. However, our report finds that it is now indicative of being young in 2024.
This has not always been the case. Compared to twenty years ago, young people today are spending 16% more of their total budget on essentials. Meanwhile, the expenditure levels of older generations remains relatively stable. Only recently, has age become the decisive determinant of the amount spent on essentials.
The collapse in the young’s discretionary spending
Since so much of the young’s budget is swallowed up by essentials, this is leaving little left over for discretionary spending, i.e. spending on “luxury” items and experiences, such as restaurants, travel and nights out. In other words, things that make people happy.
Compared to two decades ago, young people are spending on average £147 less a week on non-essentials, which translates to over £7,500 a year. For 30−49 year-olds, they are spending £160 less a week on non-essentials, almost £8,500 a year.
Astonishingly, in this same time frame, over-65s are spending £28 more a week on non-essentials. While the past decade has been one of struggle and hardship for the young, older generations have enjoyed rising prosperity.
The cause of these pressures on young people
The reasons for these trends are many and varied. It can partly be explained by stagnating incomes for young people at a time of high taxation as well as the burden of student finance.
The answer also lies in the intergenerationally unfair decisions of government spending. While working-age benefits have been frozen and cut in real terms, the ballooning value of benefits for older generations such as Winter Fuel Payments and the triple-lock state pension have ratcheted up pensioners’ income.
The devastating impact of high housing costs
However, the fundamental cause is the cost of housing. Rents continue to rise faster than wages and as a result housing costs eat up the young’s disposable income, leaving little left over for non-essential spending. Moreover, the stubbornly high cost of rent means that while the cost-of-living crisis has eased for older generations, renters have felt little relief, experiencing a “financial long-covid”.
On average, the young are spending £80 more a week on housing and fuel costs compared to twenty years ago. The typical young household spend 28% of their total expenditure on housing alone, a rise from 20% twenty years ago. Meanwhile, older generations who are more likely to be homeowners have largely been shielded from the increase of house prices instead likely to have benefited from a rise in asset wealth.
The collapse in the young’s discretionary spending is yet another damning indictment of the UK’s housing crisis.
A decades-long cost-of-living crisis for the young
The report ultimately argues that the current cost-of-living crisis for the young is not just the product of recent economic shocks but rather decades of intergenerationally unfair policy decisions. The young have been in a cost-of-living crisis for decades now, well before 2021. The government must begin to address the unique challenges young people face.
Policy solutions
In the same way these trends have been caused by intergenerationally unfair policy, they can also be fixed.
Benefits must begin to be allocated in accordance to need not age. All over-18s should be entitled to the same rates, unlike the current system whereby under-25s receive a lower rate of Jobs Seekers Allowance and Universal Credit and under-35s are entitled to a lower rate of Local Housing Allowance.
The current value of working-age benefits are insufficient to even cover the essentials. While the triple-lock has protected older generations from the rising costs of essentials, younger generations have been left behind. The report recommends that an “essentials guarantee” is introduced to ensure that the value of working-age benefits is tied to the cost of essentials.
Our findings show it is not only the most vulnerable households that are struggling with the cost of essentials, but nearly all young people are in need of help. One way of alleviating pressures on young people would be to ease the burden of student finance and reduce the repayment rate (effective tax rate) from 9% to 5%.
Lastly, pressures on young households’ budgets will only truly be alleviated once housing costs are reduced. This has to be achieved by rapidly increasing the housing supply to suppress the spiralling price of houses and rent.