How household debt is becoming the new safety net
Credit, or household debt is being used as a safety net by millions in the UK, according to new polling data released by debt advice charity Stepchange.
They estimate that 15% of people – 7.4 million individuals nationally – have turned to debt for essential day-to-day spending, while 6% of people (around 3 million) use this credit safety net on a weekly or monthly basis.
27% of people (13.3 million) say they would find it hard to meet an emergency expense like fixing the boiler or repairing damage from flooding to the tune of £200 to £300 without borrowing.
Debtfare replacing welfare
It’s now well established that people are more likely to use debt to cover their rent, health bills and even grocery shopping costs when services and incomes are reduced – whether through welfare cuts, pay freezes or both.
Susanne Soederberg has established the existence of debtfare in the US, and Johnna Montgomerie has been tracking the emergence of a debt safety net in the UK.
What’s the problem?
There are three main problems with debtfare.
- It shifts the costs of poverty, economic inequality, disability and ill-health onto the individual, through personal debt, rather than the collective, through public services.
- It contributes towards income inequality by further reducing the disposable incomes of low and middle income families through debt servicing and repayments.
- The debt safety net can quickly become a debt trap, whereas the welfare safety net was designed to act as a spring board to help people deal with emergencies and get back on their feet.
As Stepchange point out, people using debt for essential items are much more likely to get trapped in debt. Repayments come out of an already strained household budget and it becomes tempting to roll over debt at an ever-increasing cost.
This means that people using a debt safety net may fall behind on other financial commitments such as rent or energy bills. Over a third (36%) of people who used credit for essential goods are also in arrears on household bills compared to 7% of the wider population.
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What can be done about it?
To reduce existing debts, we should write down household debts that have become unpayable, particularly for those spending a large proportion of their income on debt servicing. This could be in the form of a debt jubilee, buying debt at a knock-down price and writing it off, whether backed by the government, philanthropists or mutual aid as in the US. It could also be done through insolvency and limited liability – making it more possible for people to get free of unpayable debts though bankruptcy.
But we also need to figure out ways of reducing future debt dependency.
To do this we need to provide a sufficient safety net for drops in income and emergency expenses. The local welfare which is provided by some local councils for emergency expenditure is part of the picture, alongside national recognition that rising household indebtedness is a problem which needs to be addressed at least in part through a stronger welfare state.
There are alternative ways of meeting the needs for which debt has become the solution, like the lower cost loans provided by Sheffield Money, an impartial, council-backed scheme which intelligently connects people into a network of credit unions and not-for-profit loan providers.
But we must also look at solutions which exist outside of the financial products market. For example providing refurbished white goods for broken washing machine emergencies, or helping more people tap into the sharing economy which allows the exchange of goods or services without money. Tackling low pay would also reduce the numbers relying on debt to make ends meet.
There is no quick fix to debtfare, but there is a package of solutions identified by charities, debt advisors and campaigners alike which needs to be taken much more seriously. Admitting we have a problem is the first step – which the government is yet to do. The second, harder step will be to catalyse the change.
By Sarah Lyall – neweconomics.org