- Context
- Trends in types of debt
- Conclusions and recommendations
- Points to consider
Context
Since the financial crisis began in 2007, there has been a broad shift in the nature of debt from one in which people fell into difficulty following a crisis to one in which continuing rises in the cost of living have outstripped rises in income, with the result that a “deficit budget” model of indebtedness brings new challenges and a need for new approaches from all stakeholders. The report focuses on the situation faced by low-to-middle income households and the current and potential effects of seven types of debt, noting that the new economic situation could slowly and potentially affect many more people.
Trends in types of debt
References to levels of calls refer to those to the National Debtline.
- Housing: 63% of tenants struggle to keep up with rent at the same time that more people are renting than buying, making this the fastest area of growth in calls to National Debtline in 2013. Changes to benefits have also particularly hit Housing Benefit. While low interest rates have led to a reduction in callers with mortgages (from 40% in 2010 to 25% in 2013), it is likely that many households will be vulnerable to small increases in interest rates, which are becoming a stronger possibility.
- Council tax: While council tax costs have increased more slowly than others since 2009, benefit rule changes, the referral of debt to expensive bailiffs and strict repayment conditions have contributed to a rise in callers with council tax arrears to about 25%. Many people do not regard this as a priority debt so arrears and charges can quickly escalate; this situation is likely to get worse with the continuing impact of benefit changes.
- Energy bills: Energy costs have risen sharply, with a 36% increase among the big six suppliers between 2010 and 2014 alone. Consumption has decreased but is not very flexible, leading to a situation in which 40% of low-income households felt unable to adequately heat their homes over winter in 2013. Energy debt is thus a focus of individual and social attention.
- Water bills: Rises in water costs have also dramatically outstripped income growth and inflation, so they take up a higher proportion of household income. Calls related to water debt quadrupled between 2007 and 2013. Because water companies are now unable to restrict water supply to households in arrears, so water debts are often regarded as non-priority (and thus enduring), so much so that they have affected company profits.
- Telephone bills: Smartphones appeared in 2007 and by 2013 were owned by 72% of adults in the UK. They are often the only source of internet connectivity for low-income people and have become increasingly essential in a digital economy – Universal Credit applications can only be made online. Paying for expensive phones and restrictive contracts have led to a rise in calls about phone debt from 3.9% in 2007 to 10.9% in 2013. Individualised billing means that many households spend more on communications than on energy. This is a new cost that has become essential to modern living.
- Catalogue debt: The move to online buying over recent years has been matched by an increase in paying by instalments, not least to spread the shock of essential and irregular or semi-regular purchases. This strategy to budgeting can leave people vulnerable if their income falls, as can other forms of unsecured debt.
- The cost of borrowing: While the financial crisis led to a decline in supply and demand for traditional unsecured lending such as bank loans, there has been a dramatic expansion in payday loans, which are expensive and can easily spiral but whose short-term nature is often attractive to consumers who do not want to make longer-term commitments. From 2003 to 2013 the proportion of calls from people with payday loans rose from about 1% to 13%. There is a correlation between interest rate rises and demand for debt advice more generally.
Conclusions and recommendations
The report highlights possibilities for joint working to take advantage of wider economic recovery at the time of writing and to spread benefits to the whole community. In addition to government needing to consider the effect of policy initiatives, creditors need to understand the nature of debt arising from deficit budgets (and the relationship between this and wider profitability, while advice agencies need to understand the emergence of new areas of debt (such as water and phones) and a tendency for many not to see the slow erosion of income against expenditure.
The report lists a range of steps available for dealing with the seven types of debt described above, with a focus on better understanding of the nature of debt, more early intervention, better co-operation with advice agencies, reviewing costs that tend to hit those in debt, implementing wider good practice in supporting people in debt, and preparing for the effects of a rise in interest rates.
Points to consider
- Methodological limitations: The report does not claim to be a systematic review and should not be regarded as such.
- Applicability: Some of the wider economic assumptions (such as that of economic recovery) may need to be reconsidered in the light of developments since 2014.
Full report
Changing household budgets - full report
