Damian Hinds is a former Education Secretary, and is MP for East Hampshire.
As we fuel our economy in response to the global Coronavirus pandemic, there will be much public policy focus on the size of the national debt in the months ahead. But for many people across the UK, a more tangible and immediate source of anxiety will be the burden of debt already hanging over them and their families.
Coronavirus has profound implications for household debt. We know that three quarters of people seeking debt advice do so due to an income shock, usually caused by a job loss or illness. Yet low levels of financial resilience make those in the sectors threatened by lockdown even more vulnerable.
Workers in the retail, hospitality and service sectors hit hardest take home £170 a week less than the average worker and are 25 per cent more likely to have no savings to fall back on. Of those unable to be furloughed, many will fall into (or indeed further into) arrears as they borrow money to soften the financial blow of the crisis.
The Government is clearly aware of these risks, and should be commended for its rapid expansion of the social safety net. Seven billion pounds has been injected into the welfare system. Breathing space has been delivered in the form of mortgage holidays and tax relief, Meanwhile, debt repayments in Universal Credit have been paused until July. Additional forbearance measures announced last week by the Financial Conduct Authority will undoubtedly help people through the uncertainties of the period.
But problem debt existed well before the onset of the pandemic. There must be a longer-term solution ready for when these temporary measures have lapsed. And as the Centre for Social Justice show in an important new report, Collecting Dust: A Path Forward for Government Debt Collection, problem debt has mutated over the past decade. We must adapt our policy response accordingly.
I was a co-sponsor of the High Cost Credit Bill and supported the cross-party payday charter that followed it in 2013. This called for measures requiring the then £7.5 billion payday loan and home credit sector to treat consumers more fairly and stop high-cost lenders from taking advantage of those in financial trouble.
The Government (and FCA) responded to this with tougher rules that have been successful in clamping down on exploitative practices. Although high-cost borrowing no doubt remains an issue, today we are seeing far fewer people caught in the recurring payday loan trap as a result.
But what we are seeing, as illustrated compellingly by the CSJ, is that a much larger number (and indeed higher proportion) of problems reported to charities and support services are now in relation to debts owed to government authorities, rather than for consumer credit cards or loans.
I have been impressed by the improvements made to debt collection in much of the commercial sector, where it is now commonplace to see vulnerability and financial circumstances taken into account. Regrettably, these advances have not yet been mirrored by debt collectors in the public arena.
There is a missed opportunity here. A pragmatic and sensible approach to debt collection can actually improve the rate of recovery, on the basis this may need more time and appropriate adjustment along the way. Indeed, £82 million is saved annually by consumer credit companies who provide support for debtors and set affordable repayment plans, which require fewer interventions and are less likely to default.
One of the CSJ’s findings strikes me as particularly concerning: it is councils who are the nation’s largest commissioner of bailiffs, on whom local government remains reliant to collect debt. Meanwhile, the rules governing council debt collection mean that families struggling to pay the bills have their debts rapidly inflated by further fees and charges. There is more for central government departments across Whitehall to be doing to bring debt collection practices up to par. Tragically, too often the current approach can actually worsen the initial debt issue rather than offer a sustainable path forward.
This must change – for the impact of problem debt can be devastating. In my constituency surgeries, and during my time both as Education Secretary and Employment Minister, I witnessed first-hand the immense strain it places on individuals and whole families. The stress felt by parents which filters down to their children and hinders learning. The damage done to relationships, and to employment prospects. The way it can be both cause and consequence of alcohol and other substance abuse. The evidence leaves no doubt: problem debt is one of the key pathways to poverty, and it blocks pathways out.
As we respond to the unique challenges of COVID-19, we should be conscious of the £13.5 billion mound of personal debt owed to the government, ensuring that people in already challenging circumstances are supported while money owed is recovered appropriately.
Usefully, the CSJ’s proposal to overhaul public sector debt collection through a Government Debt Management Bill offers both an ambitious and credible path forward. The Bill in question would bring practices in line with the private sector, repeal the laws which allow small debts to be escalated punitively and counter-productively, and establish a new contract of fairness between the debtor and the creditor (who remains, we should always remember, the taxpayer).
Learning from the experiences of the private sector, these reforms would both save the taxpayer money and help transform the lives of those gripped by debt. In the months to come the nine million people currently over-indebted is sadly likely to grow. As we come together to get through this difficult time, the Government should seek to offer people a route out of problem debt as part of its noble mission to spread opportunity and level up the UK.