Five things the chancellor should do to ensure a future free of problem debt: Part 1
By Fahmida Rahman, Ed McDonagh — Senior Public Policy Advocates, and Adam Butler — Public Policy Manager at StepChange Debt Charity
With party conference season over, the stage is set for the next big event of the political calendar: budget day.
The eagle-eyed among us will have noticed that this year includes a Comprehensive Spending Review. A CSR is a big task for any politician but in the wake of the pandemic, a lot more hangs in the balance. This major fiscal event is an opportunity for the chancellor to put forward his vision for a post-Covid world. And all eyes are on him to deliver a package that not only sets us on a steady path to recovery, but also delivers a better deal for those all-too-often left behind.
To achieve this the CSR must be forward-looking but also encapsulate the lessons of Covid.
For us at StepChange, this means moving towards a society that is better equipped to cope with income shocks and one in which no one should rely on unsustainable debt in order to make ends meet.
And with levelling up high on the Government’s agenda, we’re keeping a keen eye on how the chancellor intends to support recovery for the most financially vulnerable.
With that in mind, here’s the first three of our top five priorities for this year’s spending review. Keep an eye out for part two, which we’ll be publishing before next week’s announcement.
1. Deal with the Covid debt overhang
Those with low incomes were more likely to experience a sustained fall in income and more likely to have struggled with arrears as a result of the pandemic. Our polling in January showed that households with an income below £20,000 were twice as likely to fall into arrears on household bills as those with an income between £20,000 and £40,000.
These households are living with the damaging financial legacy of the pandemic even as the economy recovers, with the Joseph Rowntree Foundation recently estimating that 3.8 million households with low incomes have £5 billion worth of arrears on household bills.
Rent debt in particular is an acute risk. In August, StepChange polling showed that half a million private sector renters were struggling with £360 million in rent arrears. The Government has now withdrawn the ‘evictions ban’ and, without action to address these arrears, private sector renters are left with little protection against losing their home in the coming months.
We are therefore calling on the Government to provide a targeted debt rescue fund to help struggling tenants address arrears safely and keep their homes.
For those struggling with council tax arrears, councils must be able to show flexibility and forbearance. This means they need continued financial support from Government to boost local council tax support and accommodate debt write-off.
And it is crucial that the Financial Conduct Authority builds on the enhanced support and flexibility put in place for those struggling with consumer debt during the pandemic. At least £25 billion was borrowed in 2020 to make ends meet: those managing multiple debt and arrears problems will continue to need support and safe recovery routes into 2022.
The Government has a key role in working with regulators and providers to prevent a build-up of new debt. This is especially important with inflationary pressures affecting household bills, goods and services, as well as the fuel crisis, continuing to squeeze household budgets.
2. A stronger safety net that is always there when needed
When the economy closed down in March 2020, many households across the country faced a sudden income shock. In response, the Government quickly put in place the furlough and self-employment income support schemes. These income-linked schemes provided a far more generous safety net than Universal Credit. And for those not eligible, it raised UC (but not legacy benefits) by £20 a week to cushion the shock.
At the outset of the pandemic, the Government had to act because the social infrastructure to support people facing an income shock, as well as those unable to work, was insufficient. Due to a decade-long freeze to benefit payments and other cuts to social security, incomes for those using the safety net were far too low and borrowing had, for many, become a way to just about make ends meet.
The £20 uplift was vital to helping people to get by in the pandemic.
However, in September we estimated that around two in five StepChange clients who are on UC did not have enough income to meet their day-to-day expenses even with the uplift in place. Removing it is likely to push this figure up significantly.
Calls for the cut to be reversed are ongoing, but if the chancellor is serious about ensuring that everyone can make ends meet, longer term there needs to be a major rethink of the basic level at which benefits are set, as well as a commitment to ensuring that as the cost of living rises, benefits do too.
And importantly, the Government should ensure that deductions made to benefits do not undermine the ability of claimants to meet their basic costs. The system of deductions from UC must be overhauled so that they are only made when it is in the interest of claimants and any deductions made are genuinely affordable.
3. Make sure that the energy crisis does not escalate into a cost of living crisis
Stagnating incomes are only part of the picture when it comes to making ends meet — the cost of living is also a key factor in the people’s ability to keep their heads above water.
Low-income households spend a higher proportion of their income on essential costs than those with higher incomes, leaving them more exposed to high costs.
Risks to these households are particularly acute this winter as surging wholesale energy prices threaten to drive up bills and leave families unable to heat their homes or cook food.
Last year, 26% of StepChange clients were behind on their electricity bill and 23% on their gas bill, up from 17% and 13% respectively in 2019.
The energy price cap and Warm Home Discount (WHD) have gone some way to addressing the affordability issues households currently face. However, with additional pressures fast approaching, much more needs to be done. The Government should commit additional funding to the WHD scheme this Winter and extend access to the Cold Weather Grant to guard against short-term rising prices.
In the long term, the cost of net zero should not be allowed to increase fuel poverty. A social tariff linked directly to income, ensuring no-one pays more than a certain percentage of their disposable income on energy, would safeguard households from high prices while providing a solution to close the affordability gap for households already struggling with energy bills.
That rounds off the first three of our top five priorities for next week’s spending review. Keep an eye out for part two next week.
