Personal debt problems have a significant impact on individuals, but the government has a limited understanding of how this affects the public purse and there are weaknesses in its strategy for dealing with the issue, says today’s report by the National Audit Office (NAO).

Problem debt, which is defined as the inability to pay debts or household bills, affects around 8.3 million people in the UK. It can have significant damaging effects, such as causing anxiety and depression. It can also increase people’s likelihood of being in state-subsidised housing. Problem debt is caused by a large number of factors, including life events, access to affordable credit, debt collection practices and a person’s understanding of financial matters. An estimated 4 in 10 people in the UK cannot manage their money well day-to-day, and internationally the UK ranks below average in financial capability.

The NAO estimates that the increased use of public health and housing services by people with problem debt costs taxpayers an additional £248 million a year, and around £900 million a year to the economy as a whole. Due to gaps in the government’s data, it is not possible to model other impacts including on employment and benefits.

HM Treasury has overall policy responsibility for problem debt and works closely with many organisations across government and the private and third sectors in trying to address this issue. However, the NAO has found weaknesses in HM Treasury’s approach. It does not have any formal mechanism or forum to bring issues together in a coherent way, ensure a common understanding of priorities, or collectively hold delivery partners to account.

People increasingly report problems with debts to government or utility providers. The NAO estimates that the UK public owe at least £18 billion to utility providers, landlords, housing associations and government, such as through council tax arrears or benefit overpayments. HM Treasury has limited information on debt in these areas and, as such, does not fully understand the problem, which hinders its ability to respond effectively. The information available is much less clear and transparent than retail lending information.

Government also lags behind the retail lending sector in following good debt management practice. As an example, established best practice in how to assess affordability of repayments is used by only 19% of local authorities and is not used as standard by central government creditors. Debtors’ perceptions of whether they are treated fairly also lag behind retail lenders. A lack of data-sharing means government cannot identify individuals who owe money to more than one department, resulting in debt collection teams competing for repayments from the same person. Short-term incentives and funding pressures may also be leading to debts being pursued too quickly and aggressively, particularly in local government. NAO’s modelling estimates that intimidating actions and additional charges on over-indebted people are 15-29% more likely to make debts harder to manage or increase anxiety and depression. The Cabinet Office leads the government’s work to improve debt management practices across government, but departments, agencies and local councils are responsible for their own approaches.

To reduce the extent to which problem debt occurs in the first place, the Money Advice Service has improved coordination of efforts to improve the public’s understanding of financial matters, but its strategy does not involve all relevant parts of government. Meanwhile, the Financial Conduct Authority has taken action to improve responsible lending, for example by reducing fees and charges on a typical payday loan which it estimates saves borrowers £150 million per year. It recognises it has more to do though on high-cost credit to tackle persistent and unsustainable debt.

HM Treasury is developing proposals to strengthen statutory protections for people struggling with debt problems. The NAO recommends that HM Treasury should ensure its policies on personal debt are delivered effectively and are drawn on best practice. It must also improve the quality and availability of data from across government on the scale, nature and impact of problem debt on individuals and taxpayers.

"Problem debt has significant consequences both for individuals and the taxpayer. While government has made progress in seeking to address this issue, its attempts so far have been insufficient. The Treasury needs a better understanding of the scale of people’s debt problems and how it is impacting their lives and the taxpayer so it can effectively resolve the problem."

Amyas Morse, the head of the NAO

Read the full report

Tackling problem debt

Notes for editors

8.3 million Estimated number of over-indebted people in the UK 40% Proportion of reported debt problems in 2017-18 relating to debts owed to government, up from 21% in 2011-12 £248 million Our estimate of the minimum annual cost to the public purse of the direct impact of problem debt on a person’s likelihood to experience anxiety or depression or be in state-subsidised housing £15 billion Total outstanding mortgage arrears in 2018 £18 billion Our estimate of personal debt owed to government, utility companies, landlords and housing associations; a minimum figure based on available data and research 4 in 10 Estimated proportion of people in the UK who cannot manage their money well day to day 5,000 Approximate number of consumer credit lenders regulated by the  Financial Conduct Authority 600,000 Estimated number of people who need debt advice but are unable to access it  
  1. HM Treasury has overall policy responsibility for personal debt, and has high-level objectives in two areas: Preventing problem debt from occurring – by helping people manage their money by improving their financial capability, and coordinating government's work to ensure people can access affordable credit. The FCA regulates commercial lending, and MAS coordinates the government's financial capability strategy which covers a large number of other bodies. Minimising the impact of problem debt, by providing support through MAS and others to those who become over-indebted. The FCA regulates debt collection among commercial lenders and debt collection agencies.
  2. The proportion of problems reported to Citizens Advice relating to government debts increased from 21% to 40% between 2011-12 and 2017-18, while for consumer credit it reduced from 52% to 33%. Of the four largest central government creditors the NAO requested personal debt data from, two (Department for Work & Pensions and Legal Aid Agency) collect it, while the other two (HM Revenue and Customs and HM Courts and Tribunals Service) cannot disaggregate all personal debt from overall debt data.
  3. Indicators of financial capability in the UK are low. MAS monitors financial capability based on various measures, and estimates that 4 in 10 people cannot manage their money well day-to-day. Since 2005, it has tracked indicators of financial capability, last reporting in 2015. Of the five indicators measured consistently over that time period, four deteriorated since 2005, particularly in relation to financial skills and knowledge, while one has slightly improved. The OECD measures financial capability internationally and has found the UK to rank below average compared with other member countries, primarily due to low financial knowledge.
  4. A review commissioned by MAS which published in 2018 found there is a shortfall in debt advice to support over-indebted people - 600,000 over-indebted individuals were unable to access advice - and that capacity would need to increase by 50% within two years to satisfy demand.  MAS spends £48m a year on directly commissioning debt advice for over-indebted people, and an estimated £148m of further funding is voluntarily provided directly to debt advice bodies by other organisations or individuals.
  5. The Financial Guidance and Claims Act 2018 introduces a new single financial guidance body, which will replace MAS and two pensions guidance bodies with a single provider of impartial financial guidance and debt advice. The new body will have more formal statutory responsibilities to coordinate financial capability activities across government, but will not have additional powers to coordinate financial capability activities or to influence government organisations responsible for some of the underlying factors relating to problem debt.
  6. Press notices and reports are available from the date of publication on the NAO website. Hard copies can be obtained by using the relevant links on our website.
  7. The National Audit Office scrutinises public spending for Parliament and is independent of government. The Comptroller and Auditor General (C&AG), Sir Amyas Morse KCB, is an Officer of the House of Commons and leads the NAO, which employs some 785 people. The C&AG certifies the accounts of all government departments and many other public sector bodies. He has statutory authority to examine and report to Parliament on whether departments and the bodies they fund have used their resources efficiently, effectively, and with economy. Our studies evaluate the value for money of public spending, nationally and locally. Our recommendations and reports on good practice help government improve public services. Our work led to audited savings of £741 million in 2017.

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