A debt time-bomb is about to go off — why aren’t we doing anything about it?

The cost of living crisis is morphing into a household debt crisis. As we run out of will/levers to tackle the former, we need to start preparing for the latter, now.

It was around the Summer of 2021 when we started spotting something odd in our data about household debt.

People coming to an organisation like Citizens Advice having not paid the bills is nothing new. And there has long been an over simplified divide that has plagued policy debates about debt — is this primarily a problem of ‘can’t pays’ or ‘won’t pays’? Is it about poor budgeting and personal responsibility or inadequate income?

Then around Summer 2021 we saw a spike in the number of people in what we call ‘negative budgets’. This is when someone’s income doesn’t meet their essential outgoings — the emphasis here is on ‘essential’, not what people would like to be able to spend in a perfect world. The number of debt advice clients in a negative budget held steady-ish around 36–38% for a few years. Then it jumped to 41%. And it kept going up and up — to 51% today, with no sign of stopping.

This is based on our clients, but if it was even remotely mirrored across the wider population then the simple maths dictates a debt crisis should follow — income < essential expenditure = debt. This is the clarity that this unique kind of analysis offers. It’s not based on how people feel about their finances — it’s just inputs and outputs. If income is lower than fixed outgoings, debt should logically follow. In some ways, this is a helpful simplification of the policy debate around debt — it suggests this is definitively not about a lack of personal responsibility but is a much bigger and growing systemic problem.

Based on similar analysis, a number of organisations naturally started to sound the alarm about the debt time-bomb that was coming. But then, it didn’t quite happen. Well not yet at least. The numbers of people seeking debt advice — which had nosedived during the pandemic largely as a result of Government protections — was creeping up through 2021 and 2022, but was still lower than pre-pandemic levels.

Why weren’t there people flooding through the doors for debt advice? There could be a number of reasons for this. One is on the income side — it’s clearly not a given that income is fixed and some people will have been able to increase income to pay the bills. Second, Government interventions like energy price support clearly had an impact — even if it wasn’t enough to completely stop the bleeding. Below are the numbers of people we referred for support from food banks — you can see the temporary fall in July 2022 and it’s likely this was down to support payments landing in people’s bank accounts at this time.

Probably the biggest reason though is that people tend to be good at delaying their problems. Whether helping themselves, or helped by experts like our front-line debt advisors, people juggle around payments, prioritising payments with the most significant impacts. There is a natural time lag here — someone starts to struggle and begins by seeking help for the root cause — coming to organisations like Citizens Advice for help topping up their prepayment meter. The debt comes later, when tactics and interventions can no longer stem the tide.

So, is the household debt time-bomb about to go off? There are good reasons to believe it is . Levels of unsecured credit are starting to increase — and fast. Growth in unsecured credit is at its highest in 4 years, with credit card borrowing growth much higher at 13.5%. Arrears on things like rent, utility bills and council tax are much harder to track but our numbers are starting to go in the wrong direction — take levels of energy debt:

And this growth is not being equally felt. You can see below how disproportionately this is falling on disabled people and those with long-term health conditions.

It’s also finally starting to filter through in increasing numbers of people coming to us for debt advice.

And then there’s the grim inevitability of the maths — if income doesn’t meet basic expenditure, there’s only so long the reality can be delayed.

Faced with this, it feels like you need a policy response on two basic levels — prevention and mitigation.

The policy debate on prevention is well developed and has rightly been the focus of most of our effort. Uprating benefits and pensions by inflation, continued help with energy bills and reducing the cost of other essentials like childcare will help millions to better balance the books. There is no doubt the recent Budget announcements will help and there is more that can be done — looking at, for example, the cost of other essential bills and housing costs.

But it won’t be enough to avert a household debt crisis. Let’s zoom in on the example of Michelle’s (one of our clients) budget. The numbers still don’t stack up.

That takes us to mitigation. If you follow the logic that millions of people are heading into unavoidable debt, you would hope that what greets them here is a system and set of solutions that will help them get back on their feet, or at worst, not make things actively harder for them.

The reality is very different. The most apt description is a wild-west — search online for options to pay off debts, and you’ll be bombarded by profit-seeking firms offering misleading advice about debt solutions which won’t help. Fall behind on bills and you could find unregulated bailiffs knocking at the door.

This is solvable. All of these are well trodden policy debates. Here are four things that would help for a start.

1. When people are struggling with bills, make sure the system isn’t actively working against them. Take the example of council tax — when people miss a monthly payment, you might expect that support kicks in. To be fair to FCA regulated financial services firms, this is very often what happens. Instead — in England — one missed monthly council tax payment means a demand will automatically go out for the whole annual bill. This is mandated from central Government — the Department for Levelling Up, Communities and Housing. They could follow the lead of colleagues in Wales, and end things like this.
2. With people finding it impossible to pay bills, we’re likely to see an explosion in the use of bailiffs and other debt collectors. Bailiffs are currently unregulated — with the Ministry of Justice recently opting against a statutory regulator, in favour of self-regulation. Unsurprisingly, videos like these from the recent Times investigation into forced energy prepayment meter installations have made people question whether self-regulation of debt collectors can really work. It’s time to bring third party debt collectors under a proper statutory regulatory framework — one with teeth.
3. When someone has reached the point of no return with their personal debt, they need to have viable options to help them wipe the slate clean. The world of personal insolvency is complex but there are basically three main options — Debt Relief Orders (DROs), Individual Voluntary Arrangements (IVAs) and bankruptcy. The second of these — IVAs — has gone from a relatively niche product 20 years ago, to by far the most common — an 8 fold increase. The idea is that people make monthly payments for 5–6 years at which point they’re back in the black. But we’re seeing people every day misled by profit seeking firms into IVAs which they can’t afford. When they inevitably fail to make their monthly payments, the individual is back at square one, while the firm has often pocketed £1000s in front-loaded fees. Why is this happening? There are parallels here with the growth of the payday loan industry 10 years ago — a lot of money to be made, and lax or absent regulation. If people had FCA regulated advice before deciding which debt solution was best for them, things could be a lot better. HMT are in the process of reviewing the personal insolvency regime — now is the time to act.
4. There isn’t a direct fix, but a systemic one which might help to push debt and arrears up the political to-do list. A month or so on from the Budget, and we’re still recovering from a barrage of statistics — from the OBR, HMT and numerous independent think tanks. We (rightly) know rates of unemployment, economic inactivity, Government debt, growth and everything in between. But no-one has a clue about the size of this debt time-bomb that is about to go off. Different Government departments, regulators and the Bank of England have an eye on some of the disparate parts — e.g. energy bill arrears, rent arrears, credit card debt — but no one has an overview. This helps to explain the fragmented policy response, with everyone interested but no-one taking responsibility. What is tracked, isn’t necessarily dealt with, but it would be a good start.

These by no means represent a comprehensive policy response. Much more is needed. A consistent problem here is that policy debates on debt have always been blown off course by undertones and narratives of deserving and undeserving. But whatever your views on this, the maths speaks for itself — a household debt crisis is coming and we have a choice about whether to prepare.