The ongoing COVID-19 crisis has pushed more UK households into debt, rising by 35%, the highest level since the period following the financial crisis, it has been revealed.
According to the report by Pro Bono Economics for Citizens Advice, the number of households experiencing problem debt could rise to 1.5 million by the middle of the year, and an increase of between 370,000 and 480,000 since the start of the pandemic.
This will leave people unable to pay off credit, rent, utility and council tax bills — all leading sources of problem debt.
A fall in income for those still in work will account for around 140,000 of the total increase amid the ongoing furlough scheme, pay cuts and reduced hours.
Young people (16-24 year olds) are likely to account for up to half of this increase in problem debt, the research found, with significant consequences for their long-term prospects.
Liabilities from rent arrears was a rapidly growing problem prior to the pandemic and the latest research by the Resolution Foundation suggests that over 750,000 families were behind with their housing payments in January 2021 - 300,000 of which contained dependent children.
It added that the societal costs of problem debt are likely to top £1bn ($1.4bn) this year, with the taxpayer picking up the cost of additional mental health support and housing provision.
The report estimates that the additional pressures on the NHS and housing system, caused by the problem debt surge, may be as high as £1.25bn, an increase of £350m since the start of the pandemic.
It comes ahead of the chancellor’s budget on Wednesday, where Rishi Sunak faces decisions on the future of financial support.
Pro Bono Economics warned that the finance crisis for families in severe debt is likely to keep worsening for some time.
“We are hopefully approaching the beginning of the end of the health crisis associated with the coronavirus pandemic, but it is clear that the household finance crisis remains in its early stages,” Matt Whittaker, CEO of Pro Bono Economics, said.
“The spike in unemployment and squeeze on incomes that is expected to arrive over the coming months is set to push many households that are already close to the financial edge into an increasingly perilous position.”
He added: “The choices the Chancellor makes at the Budget on Wednesday will have an impact on millions of people’s lives and their risk of falling into problem debt. Extending furlough will certainly help, but the financial scarring this crisis has left behind is deep.
“While the furlough scheme has been a lifeline for jobs, many workers have still had to contend with sizeable pay cuts. For those already close to the edge ahead of the pandemic, such a sustained drop in income is inevitably leading to problems with bills and with debts which grow sharper with each passing day.”
The finance minister has repeatedly extended the coronavirus job retention scheme (CJRS) as the crisis has raged on, helping to cushion the blow of the pandemic and lockdown curbs on employers and their staff.
He is expected to extend the scheme again on Wednesday as well as business rate relief and VAT relief. Sunak is also set to extend the stamp duty holiday and provide new mortgage support for first time buyers.
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