Shortly before lockdown, I travelled the length of the UK visiting small charities to gain an understanding of life in ‘severe problem debt’ – from those who understand it best. In truth, I was not quite prepared for what I’d see.
The hair pulled out by parents in support sessions, whose stress filtered down to their children affecting behaviour at school. The visible strain on family relationships. The job prospects flatly denied. Its cruel encouragement towards alcohol and other substance abuse. The evidence was clear: problem debt ruins lives.
And so while there will be a lively policy debate about the size of the national debt as we fuel our economic response to COVID-19, we should be just as mindful of household debt – as perhaps the more immediate source of anxiety for many families across Britain.
For there are health implications here too: as many as 100,000 people in problem debt attempt suicide every year, with debt-related mental health issues costing the NHS some £1bn.
COVID-19 casts a looming debt shadow over households as well as HM Treasury. Three-quarters of people who seek debt advice do so due to an income shock, typically caused by redundancy or illness (both sadly not in short supply at the moment). Low levels of financial resilience permeate the hospitality, services and retail sectors worst hit, with these workers 25 per cent more likely to have no savings at all to fall back on.
Even though the government has introduced welcome temporary measures to provide relief – with bailiffs having been ordered by the Ministry of Justice to cease home visits no matter how much anti-bacterial they apply to doorbells – the problem debt pile is set to grow in the months ahead as people reach for any financial cushion they can get hold of.
Yet what also became clear in my visits was that the nature of problem debt had changed well before the onset of the pandemic.
As we show in our latest Centre for Social Justice report, Collecting Dust: a path forward for government debt collection, there has been a remarkable rise in the number of people indebted to councils and other public bodies, compared to consumer debts for, say, credit cards or personal loans.
Our analysis of Citizens Advice records shows that 42 per cent of debt problems seen by the charity last year related to money owed to the government. This has doubled from 21 per cent in 2010-11, overtaking difficulties relating to consumer credit debts, which fell from 57 per cent to 32 per cent over the same period. Departmental accounts show the total balance owed to be a staggering £13.54bn.
But while the government has made significant progress in clamping down on exploitative consumer credit (with previously household names now fading from memory), astoundingly it is the public sector who remains reliant on antiquated methods of debt collection. As I saw time and time again, this causes untold stress for families in arrears and often actually worsens the existing debt issue.
Councils referred 2.6 million debts to bailiffs last year (such as council tax arrears and, increasingly, parking fines) even though they only recovered 27p of every £1 referred. Yet the rules governing council debt collection mean that families can have small debts rapidly inflated by unnecessary fees and charges. Central government debt collectors, while less reliant on bailiffs, lag behind their private sector counter parts.
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Indeed, in some reversal, the private sector is now where thought-out vulnerability policies, independent debt advice referrals and affordable repayment plans are most widely offered.
For this approach not only supports those in debt: frankly, it makes commercial sense. This does not constitute a ‘softer’ approach to the debt. More money is recovered, fewer costly interventions are required (saving private firms £82m annually), and fewer people default.
Once the emergency debt relief measures introduced in response to COVID-19 have lapsed, the public sector should quickly glean from these insights. As the High Cost Credit Bill brought exploitative lenders to heel, now a Government Debt Management Bill would produce savings for the taxpayer and provide more people with a route out of debt.
Ideally, the bill would establish a set of ‘fairness principles’ for debt collection in law, drawing from the Financial Conduct Authority’s influential Treating Customers Fairly guidelines. It would amend the 1992 legislation governing council debt collection, removing the draconian and costly sanction of imprisonment for council tax arrears. It would introduce an independent regulator of bailiffs, undoing one of the most obvious disparities with the private sector, and address the £6.2 billion of ‘overpayment debt’ being unfairly transferred to the Department for Work & Pensions even though it was born of historical design flaws in the tax credit system administered by HM Revenue and Customs.
Given the lockdown doesn’t seem to be going anywhere, and with the debt already piling up, reform is perhaps needed more than ever. As we pull through this crisis, a Government Debt Management Bill would support those caught in the mire of debt and jumpstart the Prime Minister’s noble mission to level up the UK.
Joe Shalam is the Head of Financial Inclusion at the Centre for Social Justice