Struggling households need a recovery strategy

By Adam Butler, Public Policy Manager

Two months after the beginning of the lockdown, many of those hit financially by coronavirus are struggling — the government and regulators must act now to put in place a recovery strategy

StepChange commissioned national polling in May, two months after the lockdown period began, to understand how household finances have been affected by the coronavirus outbreak.

Our polling confirms that the coronavirus lockdown has sent an unprecedented financial shockwave through UK households: 28% of adults, or 14 million people, have experienced a fall in income, primarily through unemployment, furlough or reduced hours, and loss of income from self-employment.

Many people are affected…

The crisis has hit the income of a broad swathe of households, but some are more likely to be affected, such as those in insecure work and parents with children (especially single parents).

Partly as a result, those who are younger and women have been most likely to be affected. 45% of those in severe problem debt have been affected compared to 25% of those not in financial difficulty.

980,000 people have turned to high cost credit to make ends meet since the beginning of the crisis

We estimate that, of those affected, 4.6 million have accumulated £6.1 billion of arrears and debt, averaging £1,076 in arrears and £997 in debt per adult affected. These figures reflect the situation as of late May and are likely to increase before the lockdown is phased out; a process that remains uncertain.

Those who have fallen behind are most likely to have missed payments for utility bills, followed by council tax, rent and credit card repayments. About 580,000 people affected had not yet encountered difficulty but expected to fall behind by the end of June.

17% of adults are now worried about paying for essentials such as a healthy diet and clothing appropriate for the weather later this year

Our polling indicates that 2.7 million people have taken a payment holiday on a mortgage or credit products; of those who have taken a payment holiday, 36% expect to fall behind on regular bills before the end of June.

But those already struggling are affected most…

After borrowing to make ends meet, those affected are most often coping by using savings, asking family and friends for help, applying for Universal Credit, and selling possessions.

Of those who have fallen behind on essentials, two-thirds (67%) have also borrowed to make ends meet, painting a picture of people struggling with few options.

There has been worryingly little attention given to preventing difficulties from deepening and communicating with those who are struggling about the pathway forward.

The picture emerging, as serious as it is, is a warning sign about worse to come unless the government acts. Households need a recovery strategy.

Three policy measures that would make the most difference

Three priorities are urgent:

First, temporary measures implemented by government and regulators such as a ban on eviction for rent arrears and credit repayment holidays have provided a degree of respite for struggling households; when these measures expire, those struggling with arrears and debt must be provided with strong protections against enforcement action and unaffordable repayment demands, including:

• pre-action protocols for rent and council tax arrears, with statutory force, that provide a guarantee against eviction or enforcement action linked to arrears accumulated during the crisis;
• updated post-coronavirus guidance for utility providers addressing the adequacy and effectiveness of payment help for households with low incomes and those affected by vulnerability; and
• a package of ‘next steps’ protections coordinated by the Financial Conduct Authority for those who have accessed credit and mortgage payment holidays offering those negatively affected by coronavirus a safe route out of difficulty.

Second, protections against enforcement action must be matched with financial support. Arrears and debt accumulated during the crisis will not simply unwind safely, even with extended protections in place to prevent eviction and enforcement action: repayments will substantially reduce income, exacerbating poverty; drive mental health problems and poor physical health, increasing the difficulty of economic recovery for many; and it will create a heightened risk of debt spirals through further borrowing to meet essentials.

Even with an appropriate debt solution, dealing with problem debt is often a long and difficult journey.

To provide a fair and safe route for those who have borne the financial brunt of the crisis to get back on their feet, the government should establish a national fund to provide grants to households negatively affected by coronavirus to repay arrears and debt accumulated to pay for essentials during the crisis.

We estimate that an effective fund would cost in the region of £5 billion. This funding would primarily help those who have not directly benefitted from the coronavirus income support schemes, which are expected to provide at least £50 billion in support.

Half of those who have applied for Universal Credit since the beginning of the outbreak are showing signs of financial distress or are in severe problem debt

Third, the government should ensure the social safety net is a source of financial resilience for struggling households:

• Without sufficient income, struggling households will fall further into difficulty: StepChange has called, alongside the Trussell Trust and a coalition of charities, for urgent new emergency income protection measures such as an increase in housing support and extra help for families with children, as well as additional funding for local authorities to support those in crisis.
• With half of those applying for Universal Credit already struggling with debt, it is crucial that the government addresses problems that mean Universal Credit does not work well for those in financial difficulty; this means particularly ending the five-week wait, which is loading many of those accessing support with additional debt, and suspending non-essential deductions from payments to repay debt until a safe and fair system can be put in place.
• The scale of borrowing to make ends meet reflects insufficient income to meet living costs, but also highlights the pressing need for safer alternatives to high cost credit. The government should act urgently to extend more discretionary grants and loans through Universal Credit to support those with low incomes to meet peaks in essential costs without resorting to credit, and accelerate work to develop a national no interest loan scheme.

At the end of the outbreak, there will be hard questions to answer about why hardship and financial difficulty arose so quickly and for so many people. For now, decisions are still being made about how households are supported during the crisis.

The priority must be preventing the situation from getting worse and supporting recovery as the lockdown is wound down.