A report by the National Audit Office (NAO) has revealed that problem debt costing the economy £847 million a year. The report has found that £248m of that sum came from increased use of housing and health services
Problem debt – defined as the inability to pay debts or household bills – affects an estimated 8.3 million across the UK. The NAO’s Tackling Problem Debt study found 40% of the population struggle to manage their day-to-day finances – with a lack of knowledge and advice on money matters being factors in their difficulties. The report also identified problems with a lack of data-sharing between government departments and aggressive debt recovery methods, particularly by councils
Amyas Morse, Head of the NAO, said: “Problem debt has significant consequences both for individuals and the taxpayer. While the government has made progress in seeking to address this issue, its attempts so far have been insufficient. The Treasury needs a better understanding of the scale of people’s debt problems and how it is impacting their lives and the taxpayer so it can effectively resolve the problem.”
The NAO points out that although around 40% of personal debts are to government, “government lags behind the retail lending sector in following good debt management practice”. This is further backed up by findings from debt charity StepChange clients cited in the report, which found that more people felt they were treated unfairly by local authorities (35% of clients) than by payday lenders (32%).
StepChange strongly backs recommendations to the Treasury that urgently calls for action to address the discrepancy in how the government approaches debt collection.
The NAO estimates that:
· People are 7.76% more likely to report being depressed or anxious if they are in problem debt, which the NAO says equates to some 81,000 people at an estimated annual cost to the NHS of £24 million a year.
· People are 2.85% more likely to be in state-subsidised housing if they have previously reported being in problem debt, equating to 23,000 people at an estimated annual cost of £224 million a year.
In evaluating whether the Government is getting value for value, the NAO says “there is further to go before value for money is secured”. The report particularly identifies the poor quality of information available about the nature of personal debts owed to the government, and to utilities, compared to the high-quality data available on consumer credit and mortgages. The report states that this makes it difficult to assess risks and outcomes effectively, and also points to “perverse incentives” to recover government debt quickly, which can result in bad collection practices.
StepChange supports both the analysis and the report’s key recommendations. In particular, the charity welcomes the NAO’s focus on the impact of problem debt on individuals and its enlightened approach to assessing how this impacts in aggregate on wider costs.
The NAO has quantified how intimidating actions to collect debt, and additional charges being applied, substantially increase the likelihood of debt burdens becoming harder to manage. The knock-on increases in anxiety or depression caused by these practices have a direct and avoidable cost to the state. As well as pinpointing why good debt collection practices matter, the report starkly demonstrates why the shortfall in free debt advice provision, leaving 600,000 people a year without access to advice that would help them, is so important to redress.
Commenting on the report, StepChange Debt Charity CEO Phil Andrew said “The National Audit Office hits the nail on the head. Poor debt collection practices that fixate only on getting as much money back as quickly as possible are counter-productive and ultimately harmful. The government is simply robbing Peter to pay Paul, as the wider implications of government debt collection practices are costing taxpayers almost a quarter of a billion pounds every year. If the Treasury follows the NAO’s recommendations on how to continue its efforts towards improving the personal debt landscape, progress can undoubtedly be made to alleviate current problems. We will do everything we can to support improvements.”
Gillian Guy, Chief Executive of Citizens Advice, said “The finger is now being firmly pointed at the government to get a grip on the scale of household debt. No one has a clear picture of this and we know people we help with these problems tend to be in a more precarious financial position than those with consumer credit debts. Unless the government starts to collect and report annually on the level of household debt, it will be impossible for them to even begin addressing the problems that result from people’s financial difficulties.”
“Daily, we see the impact that falling behind on essential bills has on people and the NAO’s findings around this are concerning. The NAO is also right to say the government is lagging behind industry by persisting with poor collection practices. Our evidence shows aggressive tactics by bailiffs cause huge distress and can even push people further into debt. There needs to be an independent bailiff regulator to address this broken system.”
Joanna Elson OBE, Chief Executive of the Money Advice Trust, said “The National Audit Office has hit the nail on the head. We need to see a new cross-government strategy to tackle problem debt – which brings together the work of government departments, agencies and regulators into a single, coherent approach. The government needs to put its own house in order when it comes to how it collects the growing debts owed to government departments and local authorities, in particular.”
“With demand for debt advice at a five-year high, there is also a need to significantly increase funding for frontline debt advice services, to close the growing gap between supply and demand. The good news is the government has already taken some positive steps, with the creation of a new Single Financial Guidance Body and plans for a statutory ‘Breathing Space’ scheme. This provides a strong platform to build on and we look forward to working with the government as it responds to the NAO’s recommendations.”