A year of the pandemic and financial difficulty

by Adam Butler, Public Policy Manager

Since the beginning of the Covid-19 pandemic, StepChange has been monitoring its impact on financial difficulty and problem debt. The latest results from January this year are summarised in a new presentation here.

What can we learn a year on from the beginning of the Covid-19 pandemic in the UK?

The pandemic has affected everyone, so it’s sometimes easy to overlook the fact it has not affected everyone equally. Arguably the greatest failure of public policy making of the last year, excluding public health measures, has been the failure to fully support those who have experienced the harshest economic effects of the pandemic.

Our research shows that a substantial group — we estimate 11 million people — experienced an income drop following the beginning of the pandemic that affected their ability to meet day to day essentials and, as of January this year, their incomes had not recovered.

As this group has struggled to cope with a prolonged income shock, levels of desperation borrowing, arrears on household bills and debt problems have grown. Almost half (45%) have now used credit to make ends meet, while the number experiencing severe problem debt has more than doubled since the beginning of the pandemic to 1.9 million.

Our figures show unprecedented (in modern times) levels of hardship through the winter, with one in three (29%) of those who have experienced an income fall reporting that they have skipped meals, rationed utilities or gone without appropriate clothing for the weather.

Our data is consistent with research conducted by the Financial Conduct Authority, the Standard Life Foundation and the Money Advice Trust among others.

Inequality and the impact of the pandemic on personal finances

Why has this happened? Broadly targeted interventions such as the furlough scheme have been effective at protecting the incomes of most households, at least to some degree. This has made it easy to overlook the fact that the worst effects of the pandemic have been concentrated among certain groups.

Hardest hit are those not eligible for the furlough scheme (or the similar self-employment income support scheme) who had to rely on Universal Credit payments and usually experienced a much more significant fall in income.

It’s also worth remembering that the furlough schemes did not affect everyone equally: some employers, for example, topped up the scheme so employees faced no loss in earnings, while others did not.

Experience of expenditure through the pandemic has also varied: many have found themselves better off through reduced commuting costs and forgone spending on social activities and holidays. But utilities, groceries and home schooling have also increased costs for some, such as families with children and those who have self-isolated for long periods.

The upshot is that certain groups are far more likely to have faced serious financial difficulty:

• Those in insecure work at the outset of the pandemic (including those in work with fluctuating hours or income, who were self-employed or worked part-time) are far more likely to have experienced a prolonged income shock and to have subsequently experienced difficulty — for example, those in roles with fluctuating hours or income are twice as likely as average to have fallen behind on household bills.
• Renters in the private or social sector are also more likely to have experienced difficulty. While those aged 18–24 are most likely to have experienced a fall in income, those aged 45–54 are just as or more likely to have experienced financial difficulty or hardship, suggesting factors like income or financial commitments are just as important as age.
• Household structure is a strong determinant of experience through the pandemic: single parents and those with children aged under 5, for example, have been particularly at risk of difficulty as they have faced a squeeze on both income and expenditure (not to mention on their time). Notably, single working age adults have also been particularly at risk of difficulty.

That is not the whole picture, of course: workers in the travel and creative industries among others have experienced an exceptionally difficult year. But while it is right not to lose sight of the fact that a broad cross-section of society has been impacted by the pandemic, it is also true that impacts on personal finances have tracked pre-existing patterns of inequality.

Looking beyond the economic big picture

The government has highlighted its unprecedented spending commitment to support households and the economy through the crisis. If the government has made the pandemic about the economic big picture, it has an opportunity to make the recovery about the detail of supporting those who have fallen through gaps in support.

StepChange is campaigning for an extension of the ‘eviction ban’ beyond May and targeted financial support through grants and no-interest loans to help renters in arrears stay in their homes. This would be an important platform to stem financial and housing insecurity among those struggling most acutely.

Wider priorities include extending the essential uplift to Universal Credit beyond September and maintaining investment in local crisis support to help local authorities meet significantly increased demand for assistance.

Given that council tax is the most common debt that those in arrears and struggling with, further action is needed to prevent a wave of unrealistic payment demands and enforcement action in the coming year. Council tax regulations should be amended to require councils to put in place affordable repayment plans for those experiencing difficulty before court and enforcement action are taken, taking vulnerability and financial circumstances into account and using exceptional funding to write-off debts where necessary.

In the longer term, Covid-19 has been a blow to the financial resilience of many low-to-middle-income households, with debt accrued among those who can least afford it and meagre savings drawn down to make ends meet. As an economic recovery begins, policy makers have a responsibility to learn from this experience and to work to ensure that everyone has the means, opportunity and tools to build meaningful financial security.