Short of cash, rent and food – Britons in dire financial straits

Even on sale, payday loans are getting us into more financial trouble. PA

Britain is currently experiencing its longest and deepest economic slump in a century. But through new research we’re only just beginning to realise quite how dramatic the impact of this recession has been on UK residents.

To further our understanding of the challenges faced by many in the UK today, my colleague Stephen McKay and I have analysed large-scale government surveys as well as a new poll of the general public carried out last month by Ipsos/MORI.

We found that people are struggling to buy basic goods, raise cash in emergencies and even stay in their homes. In order to prevent further hardship, the government needs to act now.

Around 2.5 million people have been out of work since 2008 and, among those in work, earnings have been falling or stagnating for some years. In 2012, the real value of workers’ wages fell back to 2003 levels, following several years of pay freezes and economic restructuring.

In addition, one in 10 workers is “underemployed”. Such people are in work, but either wish to work more hours in their current role, or are looking for an additional or replacement job with more hours.

Less spending, more lending

As incomes are falling, the price of basic goods such as fuel and food are rising, placing enormous pressures on families to make ends meet. Our research shows that over half the population is reducing its spending in 2013. One in 10 of those who are in manual work or out of work is even cutting back on basic food items.

In 2010/11, 12% of households was finding it either quite or very difficult to manage financially, and a further 27% was “just about getting by”. These levels have increased since the early 2000s, and at least half of those on the lowest incomes (those in the bottom third of income distribution) were finding it difficult to manage financially, or were just about getting by.

There are already indications that people are borrowing more to make ends meet, but this is causing them further difficulties as they have to find the money to repay their debts. Non-mortgage borrowing - unsecured credit - increased by 10% from 2006/8 to 2008/10, and nearly one in five borrowers found these commitments “a heavy burden”. In this period, the amount of households where repayments on unsecured borrowing were over 25% of income more than doubled.

All of this means that people have very little capacity to meet unexpected expenses, even relatively small ones. About one in five of the population said they would have to borrow money if he or she needed £200 at short notice – either through a formal loan like a credit card, overdraft or personal loan, or through an informal loan from family or friends. Just under one in 10 people said that they would not be able to find this money at all.

A nationwide debt crisis

The consequences of these pressures on household finances can be quite extreme. In 2008/9, around 7% of households had entered into one of the statutory or informal actions on debt, including bankruptcy, individual voluntary arrangement (IVA) or debt management plans (DMP).

Some people even lost their homes. The number of properties taken into possession over time increased markedly from under 10,000 in 2003 to a peak of just under 50,000 in 2009. Numbers have subsequently fallen, due to a combination of factors including low interest rates and an increase in “forbearance”, where banks and borrowers agree to temporarily delay repossession.

But evictions from rented properties showed a different trend, with claims for possession increasing to around 10,000 in 2013. Recent changes affecting housing benefit will only make things worse. The overall benefits cap, the “bedroom tax” and the direct payment of housing benefit to claimants rather than landlords under universal credit all add to the expectation that evictions may rise still further.

Holding the government to account

Many of the most recent reforms of the social security system have yet to make an impact, so the nation’s poorest are about to be hit even harder. Benefits will no longer keep pace with inflation due to the caps on annual increases in benefit amounts.

Already, means-tested benefits fail to meet a minimum income standard. According to our report, current benefits only provide a single unemployed person with 38% of the income required to maintain acceptable living standards. And for a couple with two children, benefits would only give them 58% of what they need.

The government wants to encourage people into work, but wages are so low that in-work poverty is a major problem. There are more children experiencing poverty in working families than in non-working families. The problems highlighted by our research are not just related to the current recession but to long-term declines in the value of wages, and to cuts in the social security system.

We need a living wage and a social security system which do what it says on the tin: provide security for all in our society. Those on the lowest incomes - whether they are in work or not - do not have much of a cushion to fall back on. The consequences of recent reforms are likely to be extremely serious unless the government takes action to better support those who are struggling to make ends meet.