Problem debt costing economy £900m a year, says spending watchdog

The Government has an insufficient understanding of the scale of people’s debt problems and their impact on the public purse, according to a spending watchdog.

The National Audit Office (NAO) estimates that the increased use of public health and housing services by people with problem debt costs taxpayers an additional £248 million a year, and around £900 million a year to the economy as a whole.

There are weaknesses in the strategy for dealing with problem debt and gaps in government data mean it is not possible to calculate some other impacts, including on employment and benefits, the NAO said.

Amyas Morse, head of the NAO, said: “Problem debt has significant consequences both for individuals and the taxpayer. While 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.”

Problem debt, defined as the inability to pay debts or household bills, affects around 8.3 million people in the UK and can increase people’s likelihood of being in state-subsidised housing, a report from the NAO said.

Caused by many factors, including life events, access to affordable credit and debt collection practices, problem debt can also cause anxiety and depression.

Being over-indebted can also stem from a lack of understanding of money matters.

An estimated four in 10 people in the UK cannot manage their money well day to day, the NAO’s Tackling Problem Debt report said.

The NAO estimates people across the UK owe at least £18 billion to utility providers, landlords, housing associations and government, such as through council tax arrears or benefit overpayments.

There is also a shortfall in the availability of advice, the report said, adding that previous research had found around 600,000 over-indebted people need advice but cannot access it.

The Treasury has overall policy responsibility for problem debt and works closely with others in trying to tackle the issue – but it needs to fix some “weak links” which are hindering its ability to respond effectively – the report said.

There is no formal way of bringing problem debt issues together, which could help to give a stronger understanding of priorities and accountability, according to the NAO.

While the Treasury is taking a “thoughtful and well-intentioned approach” to excessive indebtedness, it should work with others to improve the quality and availability of information on the scale, nature and impact of problem debt, the report said.

Government bodies also lag behind the retail lending sector in following good debt management practice, the NAO said.

Some people may owe money to more than one government department – but a lack of data-sharing can result in several debt collection teams competing for repayments from the same person.

Funding pressures, particularly in local government, may also be leading to debts being pursued too quickly and aggressively, the report said.

Aggressive debt collection can also make the problems of people struggling to pay worse, the report said.

Analysis suggests that intimidating letters, phone calls or doorstep visits lead to a 15% increase in the probability of debt problems becoming harder to manage, and a 22% increase in the probability of anxiety or depression levels rising.

The Cabinet Office leads work to improve debt management practices across government, but departments, agencies and local councils are responsible for their own approaches, the report continued.

The Treasury is developing proposals to strengthen protections for people struggling with debts.

The NAO recommends it ensures policies on personal debt are delivered effectively and are drawn on best practice.

Charities welcomed the report.

StepChange Debt Charity chief executive 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.”

Gillian Guy, chief executive of Citizens Advice, said: “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.”

Shadow chancellor John McDonnell said the report highlights “serious flaws” in how the Government monitors information and handles the crisis in problem debt.

He continued: “The recent collapse of Wonga has yet again shown the need for better regulation of consumer lending.”

A Treasury spokesman said: “We know that problem debt can be a struggle for some people. That’s why we’re taking action, because we want to make Britain a country that works for everyone.

“We’re increasing funding for the Money Advice Service to over £56 million, enough to help over 530,000 people get the debt advice they need.

“We’re also introducing a breathing space from problem debt to give people time to get their lives back on track.”

Frank Field, chairman of the Work and Pensions Select Committee, has written to Work and Pensions Secretary Esther McVey about concerns over the level of private debt owed to government.

Mr Field said lower earning families are being locked “into a miserable cycle of debt and hunger, easy prey to loan sharks and forced to resort to food banks”.