THE BLOG

Tackling Debt Must Become a National Priority

08/01/2015 09:30 GMT | Updated 09/03/2015 09:59 GMT

There are currently 2.9million seriously indebted people in the UK. Personal consumer debt in the UK now stands at £168billion and earlier this week we found out that unsecured borrowing on credit cards and personal loans is growing at its fastest pace since before the credit crunch.

Debt is a serious problem. It is not just a problem for those unfortunate enough to be struggling with financial difficulties, but for all of us - debt costs society £8.3billion. These costs come in the form of additional health care costs, increased welfare spending, and reduced workplace productivity.

Personal debt looks worryingly as if it will be a major feature of this economic cycle of recovery. The government's figures show that the counterpart of reductions in its own borrowing, is an increase in borrowing by individuals. We have a new tougher regime regulating lending, which will hopefully prevent a new debt bubble. But to safeguard stable growth we need to focus on the causes and consequences of borrowing for ordinary people.

That is why today we're launching An Action Plan on Problem Debt, in which we're calling on the next government, whatever its political colour or colours, to commit to tackling problem debt in the UK.

We believe that there are achievable measures that can be taken to protect people from falling into debt and help reduce the burden on those who are struggling. These include better incentives and mechanisms to help people build up precautionary savings, better alternatives to damaging high-cost credit products like payday loans and ensuring better protection for people who fall into problem debt.

Savings rates in the UK are falling, as years of stagnant wage rises and soaring living costs take their toll on household budgets. Without the crucial financial buffer of savings, it is credit that becomes the financial safety net when people have to cope with a sudden change in circumstances such as job loss, reduced hours, or an unexpected bill. But using credit as a safety net often serves to trap people in cycles of unsustainable borrowing.

Our latest research clearly shows that households with modest levels of precautionary savings are less likely to fall into problem debt, and it is among those on lower incomes where the protective effects are most apparent. This research shows that £1,000 could help insulate half a million households from problem debt. The next government should make it a target for every household to have £1,000 in precautionary savings.

Successive governments' savings policies have failed to address the particular needs of lower income households. In order to achieve this £1,000 target, we need a radical rethink of both the incentives for lower income households to save and the mechanisms by which saving schemes are delivered. By incorporating "rainy day" savings pots into the successful pensions auto enrolment framework the next government could make savings a much more simple and automatic thing for people to do. And by capitalising on the pensions framing of a government and employer 'match' for some contributions they would simultaneously make it more attractive.

Saving is a better safety net than credit. Though credit has a role, it needs to be fit for purpose.

The growth of the payday lending industry in the last few years has been as astonishing as it has been frightening. As a charity we have seen a 15 fold increase in the number of people seeking our help with payday loan debts in the last five years.

But for people struggling financially, these types of high-cost short term loans have mostly served to make a bad situation worse. We need better alternatives for people who are using this potentially destructive type of credit. The next government needs to instigate a broad review of affordable credit with the objective of making progress towards the development of a large-scale mainstream offer of suitable credit products by the end of the next Parliament.

There is a currently a major gap in protections for people struggling with debt. For people with deeply entrenched financial problems there is a range of insolvency options that offer guarantees of protection from additional interest and charges and from the stress of enforcement action.

Yet for people who want to repay their debts, but have short term financial problems and people for whom insolvency and all its long term consequences isn't right, there is no guarantee of help. They face a patchwork of protections and voluntary schemes. While many creditors do offer to freeze charges and interest, the lack of a consistent approach means that when assistance is not forthcoming people often feel under pressure to take out further borrowing. The result being that they dig themselves deeper into a financial hole.

This is why we're calling for a new Extended Breathing Space Guarantee scheme which would give people better protections and the time to get back on their feet by helping them to repay their debts in an affordable and sustainable way.

With personal debt levels showing worrying signs of growth, debt needs to be a national priority for the next government. Our action plan shows what can be done to address this problem.

You can read the full version of An Action Plan on Problem Debt here.