Joe Shalam is Head of Financial Inclusion at the Centre for Social Justice.
As the Government’s credit card bends under the weight of our Covid-19 response, the national debt has exceeded GDP for the first time in over 50 years.
But the pandemic has just as alarming implications for household debt: this is, after all, the more immediate source of anxiety for families hit by coronavirus-related income shocks.
The Centre for Social Justice (CSJ) has always considered serious personal debt a pathway to poverty. We see this in the way it tears families apart, the strain it puts on employment, and its cruel encouragement towards alcohol and substance dependency. Any thoughtful poverty strategy needs to address the menace of debt for those who don’t have much to begin with.
While record amounts were repaid on credit cards during national lockdown by workers deprived of their shopping habits, expensive daily commute and flat whites, we must not let this disguise the tidal wave of debt crashing down on low-income families in Britain. A recent survey showed that low-income households were twice as likely as high-income households to have increased their reliance on consumer credit in response to the pandemic. The charity StepChange report that 2.8 million people have fallen into arrears on bills, including 820,000 on council tax alone.
In focus groups led by the CSJ across the country, community-based money advisors express deep anxiety over the loan sharks ‘licking their lips’ at the growing indebtedness and desperation in our most disadvantaged areas. Ensuring that the Illegal Money Lending Team is well resourced to combat the scourge of loan sharks will be critical going forward, as will maintaining the Financial Conduct Authority’s proactive approach to forbearance in the consumer credit sector.
But given longer-term changes in the composition of ‘problem debt’ in England, it is also the public sector’s duty to reconsider its role as a creditor. As the CSJ showed in our Collecting Dust report, recent years have seen a marked rise in the number of people seriously indebted to public bodies. Our analysis found that 42 per cent of debt problems reported last year related to debts owed to national and local government, most commonly for council tax arrears but also for tax credit and benefit debt.
This has doubled from 21 per cent a decade ago, overtaking difficulties relating to consumer debts, which fell from 57 per cent to 32 per cent over the same period.
Over the same period, charities tell us that debt collection in the private sector has changed dramatically and for the better. Galvanised by the introduction of the FCA’s ‘Treating Customers Fairly’ guidelines, we now see independent debt advice referrals, thought-out vulnerability policies, and personalised repayment plans offered much more widely.
This approach not only provides a sustainable route out for people in debt – frankly, it makes commercial sense. More money is recovered, fewer costly interventions are required, and fewer people default as they are supported to meet their obligations.
Despite this, today it is the public sector who employ the most heavy-handed and unsophisticated methods of debt collection. Out-of-date rules governing council debt collection mean that families with small debts find these rapidly inflated by punitive fees and charges. Councils working religiously to ‘in-year’ targets abandoned in the commercial sector escalated 2.6 million debts to bailiffs last year, increasingly for parking fines.
On top of this, there is some £7 billion owed to government for historical welfare debts (caused primarily by a design flaw in the old benefit system), which is now being collected bluntly via large benefit deductions as people move over to Universal Credit. This is nowhere near talked about enough and has a huge impact on the money received by welfare claimants.
At the height of the crisis the Government suspended these deductions. We need to write off historical welfare debt now so Universal Credit can do its job in helping those who have fallen on hard times, cover day to day costs, and get people back into work.
The Cabinet Office has since launched a cross-Whitehall review of debt management, which is extremely welcome. The Government should take this opportunity to introduce a Debt Management Bill. Drawing from the best of the commercial sector, the bill would establish a unit in the Cabinet Office to enable a ‘single view’ of the various debts owed by a family in order to work out an affordable repayment plan.
It would bring council debt management rapidly up to speed, amending the council tax regulations to end rules which expand debts into an entire year’s bill, and putting the existing good practice guidelines for collection on a statutory footing. Finally, it would introduce proper affordability assessments for benefit deductions and cap these at 10 per cent of Universal Credit’s standard allowance.
In short, the bill would produce savings for the taxpayer through enhanced debt recovery while providing more people with a route out of debt in this time of crisis. An effective Conservative poverty strategy must aim to get people out of debt, not just get debt out of people.