Reference Budgets


The use of reference budgets

Reference budgets – and similar systems – are a widely used tool in debt prevention, debt advice and budget information work. For these different aims, one can use different forms of reference budgets:

arrow Poverty measurement
arrow Budget information, debt counseling

arrow Credit scores
arrow Purchasing power calculations

 Poverty measurement: a minimum basket of goods and services is set up for different household types. A family with an income below this level of a certain reference budget is considered poor.

Budget information, debt counseling: Households that cannot make ends meet, can be helped by presenting a reference budget to them for their situation. They can compare their own expenditures to the reference budget and they can get ideas on what expenditure groups spending can (or should) be cut. With that, problems of over-indebtedness may be tackled. Not only the individual household, but also debt advisers can make use of these reference budgets.
Households can also simulate what might happen to their spendings when their circumstances change. What does a child cost? Does that loan fit in my budget? What happens if I move from one place to another?

Credit scores: Reference budgets are an important base to calculate what a certain household can responsibly borrow (loan to income-ratios) and thus to present alternative – and more responsible – credit scores (as compared with the ones currently used by financial service providers).
For example: Nibud has developed a methodology based on reference budgets that can indicate whether a loan can be repaid by a household. Nibud is at the moment responsible for the loan-to-income ratios for mortgages in the Netherlands and is in discussion with the financial sector to extend this to other forms of credit. Also some housing corporations check the reference budgets in their rent policy.

Purchasing power calculations: With reference budgets it is possible to trace differences in income and expenditures of a certain type of household due to (changes in) policies. The budgets can make visible which household groups are faced with problems making ends meet. Reference budgets are among the few instruments that draw attention also to intra-household distribution. In the framework of budget advice the well-being of children as an important budget factor can be included more clearly. They can also be used to show the poverty trap, where households are worse off when working than with a social benefit.


Value of reference budgets
Using reference budgets in the above mentioned areas can be an important contribution to more effectively combating poverty and social exclusion. Budget information and credit scores can reduce problematic debts, and thus stimulate social inclusion. Advising public authorities on purchasing power effects of their policies also stimulates that these policies are directed more towards households and their real needs. While social inclusion and social protection policies usually have a strong focus on income, there often is a lack in considering expenditure patterns, needs and costs in realistic terms. Reference budgets can help to overcome this lack of information and contribute to discussions about poverty definitions and lines that go beyond income statistics. In so doing they also feed into discussions about social standards and adequate income systems as they are currently considered in the framework of the EU recommendation on Minimum Income.

Reference budgets are a reference for households' spending patterns, never a prescription how an individual household should spend its money. Personal circumstances and the real life experiences of low income households must always be taken into account.

Project coordination and contact: Applica sprl, Rue Van Campenhout 37, 1000 Brussels (Belgium)