35% increase in households pushed to the edge on debt

The number of households experiencing problem debt could rise to 1.5 million by the middle of the year, the highest level since the period following the global financial crisis and an increase of 370,000 – 480,000 since the start of the pandemic, according to research published today by Pro Bono Economics. Young people are likely to be especially affected, with 16-24 year olds potentially accounting for around half of those newly unable to pay their household bills and debts.

The report, produced by social sector specialists Pro Bono Economics for Citizens Advice, is published just as the Chancellor faces crunch decisions on the future of financial support at the Budget. The researchers are warning that the finance crisis for families in severe debt is likely to keep worsening for some time.

Much of the 33-43% rise in the number of households projected to be thrown into this serious financial difficulty stems from expectations about unemployment in the coming months. However, the modelling suggests that income drops for those still in work – associated with furlough, pay cuts1 and reduced hours2 – will account for roughly 140,000 of the total increase. This finding supports recent research by Citizens Advice suggesting that renters, young people, parents of children under 5, those on zero-hour contracts and those from BAME backgrounds all particularly likely to have at least one unpaid household bill as a result of the crisis.3

Tax credit overpayments, Council Tax arrears, benefit overpayments and water arrears are all leading sources of problem debt. However, liabilities from rent arrears was a rapidly growing problem prior to the pandemic and the latest research by the Resolution Foundation suggests that over 750,000 families were behind with their housing payments in January 2021, 300,000 of which contained dependent children.

As problem debt rises, so too does the cost to both the taxpayer and society associated with supporting those struggling to pay their rent and those suffering from stress and poor mental health: the Money and Mental Health Institute suggests that almost half of people in problem debt have mental ill health.4 Today’s report estimates that the additional pressures on an already strained NHS and housing system caused by the problem debt surge may be as high as £1.25 billion, an increase of £350 million since the start of the pandemic.

Charities are particularly concerned about the long-lasting impact of problem debt for young people. Younger age groups are more likely to have lost their jobs, to have been furloughed, to have seen their incomes reduce, and to have struggled to find new work.5 The research suggests nearly half of the growth in problem debt is set to be concentrated among 16-24 year olds, resulting in over 100,000 young people unable to pay their household bills and arrears.

Matt Whittaker, CEO of Pro Bono Economics, said: “We are hopefully approaching the beginning of the end of the health crisis associated with the coronavirus pandemic, but it is clear that the household finance crisis remains in its early stages. The spike in unemployment and squeeze on incomes that is expected to arrive over the coming months is set to push many households that are already close to the financial edge into an increasingly perilous position.

“The choices the Chancellor makes at the Budget on Wednesday will have an impact on millions of people’s lives and their risk of falling into problem debt. Extending furlough will certainly help, but the financial scarring this crisis has left behind is deep. While the furlough scheme has been a lifeline for jobs, many workers have still had to contend with sizeable pay cuts. For those already close to the edge ahead of the pandemic, such a sustained drop in income is inevitably leading to problems with bills and with debts which grow sharper with each passing day.

“This new research adds further weight to the case for extending the Universal Credit uplift in the coming Budget. Providing support for those individuals and families at the sharp end of the labour market shock associated with Covid is any case the right thing to do, but it also makes sense from an economic perspective because it will help reduce the taxpayer costs associated with dealing with the fallout from any surge in problem debt. With younger people especially exposed to such difficulties, the Chancellor should also view it as an important investment in the country’s future.”