Dragged down by debt: Millions of low-income households pulled under by arrears while living costs rise
23rd October 2021
A report from the Joseph Rowntree Foundation
This new research highlights that low-income households, who have borne the financial brunt of the pandemic so far, are also being dragged down by debt as we look to our economic recovery.
Dragged down by debt: Millions of low-income households pulled under by arrears while living costs rise.
We find that 3.8 million low-income households across the UK are in arrears, and 4.4 million have had to take on new or increased borrowing through the pandemic. Many of these households weren't in arrears before the pandemic, and have faced income loss and increases in their expenses.
We are calling on the Government to do the right thing and release these households from the burden of arrears by reinstating the Universal Credit lifeline, providing grant funding for targeted debt relief, and addressing key drivers of debt through system reform.
Reinstating the Universal Credit £20 Lifeline to help prevent low-income households accruing more unmanageable debt.
Providing grant funding for targeted debt relief: Government should at least double the Household Support Fund to equip local councils and debt support organisations to provide targeted relief to low-income households facing unmanageable and unaffordable debts accrued during the pandemic.
Addressing the drivers of debt through systemic reforms, through preventing low-income households from accruing debt as soon as they claim Universal Credit and writing off historic tax credit debt.
The pandemic has had dramatically different effects on the position of household balance sheets. While many better-off households built up savings and saw their assets increase in value, low-income households have been more likely to see incomes fall, to run down what little savings they had and fall behind with their bills. The pandemic has left low-income households dragged down by debt, with far-reaching impacts on individual families and the wider economy as we enter the recovery.
This briefing shares findings from a large-scale study of households on low incomes (the bottom 40% of equivalised household income) conducted in September/October 2021. It reveals the extent of arrears on essential bills and additional borrowing families have taken on. During the pandemic the Government took bold action to protect incomes and jobs, but it wasn't enough to prevent an overhang of debt that many will struggle to repay. The Government's decision to proceed with the £20-per-week cut to Universal Credit and Working Tax Credit in October has left many of the same families facing inadequate incomes just as the cost of living is spiralling, piling further pressure on family finances.
Prior to the pandemic, in 2019/20, the Family Resources Survey showed 11% of low-income households were behind on at least one household bill or credit commitment. While our new research is not perfectly comparable, our study found 33% are now in arrears. This stark increase is deeply worrying as we look to our post-pandemic recovery.
We find an estimated 3.8 million low-income households (33%) are in some form of household arrears, and 4.4 million low-income households (38%) have taken on new borrowing or increased their existing borrowing during the pandemic. There is significant overlap between these two groups - over two thirds (69%) of households who have taken on new or increased lending during the pandemic are also in arrears.
A large majority (87%) of low-income households now behind with their bills report they were always or often able to pay all their bills in full and on time before the pandemic, underlining the pandemic's extraordinary hit to household balance sheets.
Essential bills make up the majority of low-income households’ arrears. We estimate that arrears currently stand at £5.2 billion across the UK, with £3.4 billion coming from household bills like rent, council tax and utilities, and £1.8 billion from personal borrowing arrears.
Breaking arrears down into four broad categories of housing arrears, utility arrears, state debt arrears and personal borrowing arrears, we find seven in ten low-income households in arrears (2.7 million households) are in more than one type of arrears, and 35% (1.3 million households) are in three or more types. Debts owed to the state feature heavily for those in multiple kinds of debt, with council tax arrears making up half of the estimated £1.5 billion owed to the state. By easing the burden of this debt, the Government would ease the situation for heavily indebted households.
Low-income Universal Credit (UC) recipients are one of the hardest hit groups, with 7 in 10 grappling with arrears even before the cut to UC had taken effect. Despite the Government’s talk of shifting to a high wage, high employment economy, our polling found that 50% of Universal Credit recipients said they did not feel confident they could find a job or work more hours. A large minority (40%) was not confident they would be able to pay their bills in full and on time in future, and not confident they will be able to avoid taking on more debt (35%). With around half planning to cut back on essentials like food to manage their budgets, an alarming picture emerges as we head into a winter where inflationary pressures and an energy crisis will be pushing up bills.
With many low-income households still reeling from the financial impacts of COVID, once again extraordinary measures are needed if we are to give families the firm foundations they need to flourish and take part in our economic recovery.
We recommend the Government:
• Reinstate the £20 lifeline to Universal Credit and Working Tax Credit - and extend it to people on legacy benefits - to help low-income households pay off pandemic arrears and limit the accrual of further unaffordable debt, especially as cost-of-living pressures increase.
• At least double the recently announced Household Support Fund and give it an explicit focus to enable local councils and debt support organisations to provide targeted relief to low-income households facing unmanageable and unaffordable debts accrued during the pandemic.
• Address the drivers of debt through systemic reforms, through preventing low-income households from accruing debt as soon as they claim Universal Credit, and writing off historic tax credit debt.
Alongside this emergency support, Government must act to prevent damaging cycles of debt in the longer term. These include addressing social security adequacy to help more people avoid getting into debt; redesigning UC deductions with people with experience of them, so they cause less hardship; implementing best practice across state debt collection; and ensuring that when people need it, they have easy access to affordable credit alongside debt and insolvency support
In addition to Government action, personal lenders and utility companies can play a key role through forbearance. Like earlier in the pandemic, the Government should work with companies to enable forbearance around arrears and debt collection.
As we head into the winter, with a looming cost of living crisis on the horizon, our polling paints a deeply concerning picture of low-income households struggling to keep their heads above water, juggling multiple debts and deepening arrears. Now is the time for the Government to take urgent action to support families at risk of being pulled under by debt so they can move into the recovery with a genuinely fresh start.
Read the full report HERE