The seismic shifts the Covid-19 pandemic has created in the UK economy have dramatically impacted the personal finances of the most vulnerable in society. With around 900,000 fewer jobs and 8.9 million people potentially experiencing cuts in their income through furlough, more people are turning to borrowing to stay afloat and to pay for the basics. In December, Citizens Advice estimated that 7 million adults were behind on at least one household bill, with renters, young people, parents of children under 5, those on zero-hour contracts and those from BAME backgrounds all particularly vulnerable to this financial stress.

This evidence of more people borrowing and struggling financially is likely to foreshadow a significant growth in “problem debt” – when someone becomes unable to pay their debts or household bills. Our analysis, commissioned by Citizens Advice, finds that there could be at least 1.5 million households at risk of problem debt by mid-2021 as a result of the economic fallout from the Covid-19 crisis - an increase of 370,000 – 480,000 households compared to pre-crisis levels. Around 150,000 – 270,000 of this increase is down to expected job losses, while a further 140,000 working households are at risk due to reduced incomes after being furloughed or having hours reduced.

This rise is a serious concern. The stresses and strains of unmanageable debt are closely related to wider problems in people’s lives such as financial exclusion, family breakdown and poor physical and mental health. It is also a concern for wider society, as it has significant resultant costs to public services. Indeed, we estimate that current problem debt is likely to cost the government in the region of £0.35 billion per year as a result of increased demands for mental health support and statutory housing provision, with a total cost to society of around £1.25 billion per year once the costs of lost employment are included. This is an increase in costs to society from problem debt of around £350 million per year as a result of the Covid-19 crisis.

Our modelling suggests nearly half of this impact could be concentrated in the 16-24 age bracket, reinforcing fears that the financial burden of the crisis is falling disproportionately about the shoulders of the young.

These estimates add to the growing evidence about the impact of the crisis on the personal finances of the most vulnerable in society. It highlights the need for government to consider what measures could be introduced to support those struggling with problem debt and help the UK to “build back better”. Citizens Advice are calling on the government to provide financial support for people who have built up debt because of the pandemic. They believe financial support should be prioritised for people with rent and council tax arrears, where the consequences of having arrears can be most severe.

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