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Problem debt is not just a personal issue; it incurs additional costs for society and holds back growth. Financial stress exacerbates pre-existing health conditions and increases pressure on the NHS, for example. It has also been found to negatively impact job seeking and the ability of over-indebted households to sustain employment. In the ongoing cost-of-living crisis many households have also cut back spending—even on essentials—to repay debts they can no longer realistically afford. Baker Tilly research commissioned by StepChange over ten years ago estimated that the social cost of personal debt was more than £8 billion per annum. In the decade since that figure will have undoubtedly risen further. There is now also a much better understanding of the negative impacts of ‘debt overhangs’ for the wider economy. If the Government is serious about growth, the nation’s household debt burden needs to be tackled head-on.
There are some simple things Government can do. In June, it acknowledged that “ensuring millions of children and young people are not held back is...crucial to economic growth.” In that light, now is surely the time to abolish the two-child limit benefit policy that has pushed an estimated 30,000 children below the poverty line.
But more systemic measures are also needed. These include an overhaul of our outdated personal insolvency framework. As outlined in the Insolvency Service's latest Annual Plan, its ongoing review of the personal insolvency framework is intended to support the Government’s growth objective. This is encouraging, and it is anticipated that substantial reforms to the insolvency framework will be proposed soon. There is a pressing need to establish a unified gateway to a streamlined insolvency procedure, abolish Individual Voluntary Arrangements—which are often costly and carry a high failure rate—and ensure adequate safeguards for the homes of insolvent debtors. However, implementing such significant changes will require primary legislation, which Government will need to set aside.
Improved insolvency procedures are also unlikely to be sufficient on their own. Government has not yet recognised how credit reporting frustrates the public policy objective of debt forgiveness and a ‘fresh start’. While Bankruptcy and Debt Relief Orders offer a swift discharge from debts, those taking these routes are then penalised within the consumer credit reporting system for years afterwards: limiting their opportunities to use credit productively.
Knowing that credit scores, and their future access to credit will be impacted if they enter insolvency also deters borrowers from seeking debt relief in the first place. The reporting system 'disciplines' borrowers to behave in ways that generate profits for lenders instead: encouraging them to maintain debt repayments for longer than would otherwise be the case and contributing to the ‘debt overhang’ that curtails future consumption and growth. An overhaul is needed to ensure that market-led gatekeeping arrangements to consumer credit do not continue to frustrate wider public policy objectives.
The Human Cost of Debt
The effects of problem debt are well known. It damages mental health, drives people out of work, and forces families into impossible choices. A 2020 study using data from the Wealth and Assets Survey found that the impact of falling into arrears is comparable to other destabilising life events, such as sudden unemployment.
The extent of financial hardship is now too large to be ignored. Citizens Advice recently reported that four million people in England and Wales are in a negative budget (where income doesn’t cover essential costs), including 860,000 families with children.
Our Financial Shield pilot in South London, which embeds benefits advice and support with debt problems in GP surgeries, highlights how health and money troubles feed each other. Integrated solutions are needed, and we welcome the direction of travel set out in the 10-Year Plan for the NHS to incorporate debt advice within neighbourhood health centres.
But, as yet, it is not clear where the funding for this will come from, nor how the current Money and Pensions Service recommissioning of community-based debt advice will support this ambition. There appears to have been a lack of joined up thinking. For the people we spoke to in South London, where we heard stories of parents skipping meals so their children could eat, and individuals battling illness while facing mounting bills, obtaining access to effective advice services and debt solutions in their communities is critical. Incorporating services like Financial Shield into local health services needs to be taken forwards urgently and the Budget offers an opportunity to provide the up-front investment needed to make that happen.
Debt Relief as Growth Policy
Ministers rarely describe debt relief as a growth policy, but the logic is unavoidable. Poverty and over-indebtedness drag down education, skills, health, and productivity. When millions are experiencing financial hardship, the whole economy suffers. Thankfully, the need for a broad debt write-down is increasingly being recognised. Local councils are reassessing uncollectable debts. Leeds City Council approved over £650,000 in Council Tax write-offs earlier this year, while proposals in Scotland for millions in Council Tax debt to be written off were supported by multiple MSPs only two months ago.
Ofgem is also currently consulting on introducing a one-off, time-limited scheme aimed at helping domestic energy customers who built up historic debt during the energy crisis. Ofgem’s role is economic, not social: it recognises that helping people clear unsustainable debts can strengthen the energy market.
Writing off debts could reboot consumer credit markets too. Public policy choices taken both before and since the Financial Crisis initially benefitted the consumer credit industry. Flexible labour markets (e.g. zero hours contracts with no guarantees of work) combined with austerity economics and social security cuts to drive household reliance on credit. But the Pandemic and subsequent cost-of-living crisis have served to dramatically increase the likelihood of missed payments and default risk. When policy choices result in severe financial insecurity, the pool of customers who can affordably service their credit commitments shrinks driving up costs for lenders, which are ultimately passed onto borrowers.
This, too, has consequences for growth. Consumer credit does not only provide a mechanism for households to manage cashflows and obtain goods and services otherwise beyond their reach, it also provides people with opportunities to invest in their futures. When used wisely, affordable consumer credit can help improve access to education and employment, for example. And, if directed properly, it could also help households reduce their carbon footprints. Without a properly functioning safety net, the chances of being able to access affordable credit and use it for these productive purposes are considerably reduced for lower income households.
A different type of growth strategy
A growth plan that ignores the weight of personal debt will be short-lived. One that tackles it can deliver more sustainable growth. As well as reforming our insolvency procedures, the underlying causes of problem debt must also be addressed. Government certainly needs to scrap the two-child limit on benefits. But it also needs to restore the safety net more broadly. More work is also needed to determine how our welfare systems and consumer credit markets interact and shape each other.
The Budget offers a critical moment to reframe how we talk about debt, welfare and growth. If financial insecurity, poverty and over-indebtedness are recognised as barriers to growth then tackling debt becomes a matter of economic necessity, not just social justice. Tackling household debt and restoring the safety net are the essential foundations on which future, responsible, consumer credit markets would be able to build.
