Debt is a growing problem for people on low incomes and it has been made worse by the austerity policies that followed the 2007-08 financial crisis. The UK’s poorest households have the highest debt-to-income ratio in comparison to other income groups. This often means they struggle to repay their debt because it is so high in relation to their earnings. Many are forced to cut back their spending on basic necessities just to keep up with repayments – or they may borrow more, increasing their debt burden further.
Our calculations, based on the latest Office for National Statistics data, show that the financial liabilities of the UK’s poorest households (excluding mortgages and student loans) were more than two and a half times their monthly income after tax and other deductions.
What is more remarkable is that a significant proportion of this is accounted for by unarranged debt – when people go into their current account overdrafts and do not pay their bills. As shown in the diagram below, the unarranged debt of the poorest households (with an average annual income of £4,587) relative to their incomes was more than 60% higher than all other households in 2014-16.
Our interviews with people from debt advice charities and heavily indebted low income households shed some light on the causes of high debt in general and why the poorest households rely on unarranged debt in the form of overdrafts and unpaid bills in particular. It was apparent that austerity measures hit the welfare system to such an extent that they severely limited the means of survival for the poor and forced them into debt for some of their most basic needs.
For example, our estimates show that the number of people with rent, water and council tax arrears grew around fourfold. Meanwhile, those behind on their energy payments almost doubled between 2009 and 2016.
Cuts across the board
The government’s austerity programme of spending cuts directly contributed to the debt problem of poor households through a number of channels. There have been top-down cuts in the welfare and social policy budgets of central and local government departments.
This limited the means of survival for those who partly or wholly depended on benefits. According to estimates of the Office of Budget Responsibility, a total of £45.4 billion will have been cut from the welfare budget from 2010 to 2021.
Austerity has also contributed to rising household debt through the increasingly widespread use of benefit sanctions. These are penalties that are imposed on welfare claimants for “purportedly” failing to meet the various criteria required to receive benefits. Once sanctioned, benefits are stopped, which effectively cuts a lifeline for families, at least for a period, forcing them to rely on borrowing or to default on household bill payments.
Yet sanctions were frequently applied to people for reasons out of their control. Administrative errors often led to sanctions and these became more common as a result of the changes related to the welfare reform, as well as transition to the Universal Credit. The benefit cap, introduced through the Welfare Reform Act 2012, led to an increase in recipients’ required contributions (towards rent and council tax accounts). In cases where they could not afford to make higher contributions, they were sanctioned.
Sanctions also increased as a result of extensive monitoring of benefit recipients through work programmes and digital tracking of their job search efforts, reviews and assessments. An independent review of job-seekers’ allowance sanctions, for example, found that the sanctions affected some of the most vulnerable people unjustifiably due to ineffective communication with them.
In 2013 the proportion of sanctioned recipients of job-seekers’ allowance more than doubled in comparison to years before the crisis. This trend continued with close to half a million sanctions being applied in 2015.
Aggressive debt collection
Austerity has also brought about harsher practices by local governments for debt collection. There has been a rise in their use of debt management companies, court actions, bailiffs and evictions, sending the poorest households into further debt.
The debt charity StepChange found that sometimes bailiffs visited homes outside “reasonable hours” or continued action, despite clients agreeing a repayment plan.
Some even entered homes when only children were in or contacted friends and family about people’s debts. Around 40% of respondents of another StepChange survey said they were treated badly by a local authority creditor, and the government’s debt collection practices were rated “no better than payday lenders”.
The aggressive debt collection practices of local authorities have arisen from the brutal reduction (over 50% in real terms) in their budgets as a result of central government cuts. But, paradoxically, the benefit cap and the sanctions not only led to more debt for poor households, it has also resulted in a major shortfall for local government due to the resulting non-payment of rents and council tax. So, in their attempt to fill the gaps in their budgets, local authorities have shot themselves in the foot and become inadvertent creditors for low income households under austerity.
It is significant that, while the governments bailed out the country’s banks, they imposed severely punitive and precarious welfare provision for low income households. This cut or restricted their lifeline to meet essential needs. Hence, it effectively led to greater indebtedness. Many of the country’s poorest households were, as a result, forced to choose between growing debt to pay for their essential needs and going hungry or cold.