Negative budgets are a growing problem
More people in debt can’t even cover key living costs — here’s what needs to be done to tackle this growing problem
When it comes to problem debt, it can be easy to jump to the conclusion that it’s a result of overspending, running up big credit card bills, or poor money management.
That story doesn’t ring true for advisers at Citizens Advice and it’s far from the reality for many of those struggling with debt. For the first time, we’ve analysed 129,000 household budgets which are put together by debt advisers when helping people manage their debts.
We found that the proportion of people we help with debt who have a negative budget has grown from under a third (32%) in 2016, to nearly 2 in 5 (38%). Increasingly, our debt advisers are helping people who simply don’t have enough money to cover the costs of essentials such as rent, utilities, and food, let alone start repaying their debts.
What’s a negative budget?
A negative budget is where each month someone’s income doesn’t cover key living costs. This is typically identified through the debt advice process using a tool called the Standard Financial Statement.
For people like Dan, who came to Citizens Advice for support with his debts, a negative budget means struggling to cover essentials:
Dan’s unable to work as he’s awaiting an operation due to a back injury and his wife, Sarah, had to give up work to look after her parents. Dan and his wife have fallen behind on their priority bills including rent, energy and council tax due to their change in circumstances and complicated changes to their income. Dan doesn’t feel that their debts are a huge problem — he’s more concerned about managing the day-to-day living costs. Dan’s struggled to pay their full monthly rent payments due to their Universal Credit payments not being enough to cover all their essential outgoings.
Why do people have a negative budget?
The causes of negative budgets are incredibly complex. But on the simplest level, there are 2 main reasons:
- They have low incomes
Many people with negative budgets are in work, with over a quarter (28%) in full-time work. However, on average their income is lower than people with a positive budget.
One crucial driver of low income has been the benefits freeze. From April to August 2019, 4 in 10 (40%) people we help with debt who claim income-related benefits don’t have enough money to cover their costs. This is up from 32% in 2016/17.
2. They spend a high proportion of their income on fixed expenditure
People with negative budgets don’t overspend. Our research shows they spend very similar amounts to people with positive budgets. However, due to low incomes, people with a negative budget spend a very high proportion of their incomes on everyday fixed living costs such as rent and utilities.
People with negative budgets spend an average of 90% of their income on such outgoings compared to 62% for those who have a positive budget. For people struggling with a negative budget, this often means most if not all of their money has gone by the time they have covered their rent, council tax, and bills.
Tackling negative budgets
People can’t manage with a negative budget for long: they can’t spend money they don’t have. The reality is people with negative budgets fall behind on household bills, into rent or council tax arrears, struggle to repay debts they already owe, and are forced to go without essentials such as food and heating. We’re calling for 2 actions to start tackling the growing problem of negative budgets:
1. Debt advice providers need to respond to the challenge
The options for people with negative budgets can be limited. Accessing a debt or insolvency solution could help resolve current debts, but would do little to resolve the underlying causes of a negative budget and many simply can’t afford a solution — bankruptcy has a fee of £680. We want to work with other advice providers to identify how advice can adjust and continue to help people find a way forward.
2. The government needs to put money back in people’s pockets
More generally, policymakers interested in improving living standards have two places to look. They can increase incomes or help reduce key living costs for those who are struggling. As a start, the government should go beyond its decision to end the benefits freeze and uprate frozen benefits by the Consumer Prices Index (CPI) plus 2% for 4 years. For many people we help, simply uprating frozen benefits in line with CPI will not be enough to enable them to make ends meet.
Over the coming months we’ll be looking at how the debt advice sector and policymakers should respond to help households get by.
You can read more in our Negative Budgets: A new perspective on poverty and household finances report and, if you’re interested in speaking to us about this work, please get in touch by emailing us at jasmin.matin@citizensadvice.org.uk and joe.lane@citizensadvice.org.uk.
