Households struggling with problem debt climbs 28% in three years as economic recovery fails to reach vulnerable

Some 700,000 more young adults, self-employed and low-income families are struggling than in 2012

There are now more than three million people in “severe problem debt” (Peter Macdiarmid | Getty Images)

The number of households with problem debt has soared 28 per cent in the last three years leaving 3.2million struggling, compared to just 2.5million in 2012.

A new report published today by the TUC and Unison sends out a warning that the economic recovery is not yet reaching vulnerable people.

‘Britain In The Red’ reveals that 700,000 more households have falling into problem debt since 2012 leaving them forced to spend a quarter of their monthly gross income repaying credit cards, loans and overdrafts.

And the hardest hit have been young people, the self-employed and low-income families.

Problem debt costs the UK economy £8.3bn, according to the debt charity StepChange. Union leaders warn today that the financial difficulties facing vulnerable people reveal how economic growth has failed to reduce the burden of debt repayments for many and that wage stagnation has left an increasing proportion of households having to borrow more than they can afford just to get through each month.

“Rising household debt is not the sign of a healthy economy,” pointed out TUC general secretary Frances O’Grady said.

“People raiding their piggy banks and borrowing more than they can afford is what helped drive the last financial crash. The fact that more and more are getting into problem debt is particularly worrying given the prospect of interest rates going up.”

Unison general secretary Dave Prentis warned that things are not likely to get better any time soon. While wages might finally be picking up for those in the private sector, anyone working in health, education, local government and our other public services still has many more years of pay restraint to survive, he said.

He also pointed out that the soon-to-be-introduced cuts to tax credits will push many low-income families deeper into debt.

“It is going to take many years for families to get back on an even keel,” warned Mr Prentis. “People having to rely on their credit cards, friends and family, or pay day loans just to get through the month is not a sustainable route for our economy.”

Alison McGovern MP, Labour’s Shadow Treasury Minister, said: “The increase in the number of households are experiencing ‘problem debt’ is a sign of the government’s failure to build a balanced recovery that reaches all part of the UK.

“Now George Osborne is planning to hit millions of people on middle and low incomes with plans to introduce a work penalty into the tax credits system. Instead the Chancellor should focus on taking action to help create a more productive economy, with higher living standards and better wages.”

The report reveals that that half – around 1.6 million - of those with problem debt spend 40 per cent of their gross income on unsecured debt repayments. Lower-income households account for two-thirds of that number.

It also shows that the number of low-income families with problem debt climbed from 9 per cent in 2012 to 16 per cent in 2014.

Mike O’Connor, chief executive of StepChange said the report comes as little surprise. “The findings should serve as a stark warning that problem debt is an issue that requires urgent attention,” he said.

He called for better protection for people who fall into debt to ensure that temporary difficulties do not become long-term intractable debt problems. He said there should be better incentives and mechanisms to help people save and insulate households from debt problems.

“Earlier this year the government announced its plan to consult on proposals that would give those people seeking help with their debts ‘breathing space’, through guaranteed freezes on interest and charges and a halt on enforcement action when they commit to taking action to tackle their debt,” he reported. “We hope the new government will commit to ensuring that this review goes ahead.”