When it comes to how Covid-19 has affected the nation's finances, headline figures show an increase in savings and, subsequently, a decrease in debt. However, in reality, more and more people are dealing with financial hardship. Those in that situation tend to be in lower-income households. As a result, the pandemic has caused a wider divergence of financial equality in the UK.
A new report from the Money and Pensions Service delves deeper into what exactly has happened to debt levels across the nation. It looks at where and why financial health has worsened since the start of the pandemic. The report zeroed in specifically on requests for debt advice, which allowed the review to glean an accurate picture of debt in the UK and those affected by it.
In short, the review found that while requests for debt advice dipped substantially at the beginning of the pandemic, they look set to rise. The dip in debt advice requests was likely reflective of widespread pausing of any activity during March 2020. Now, with financial support likely to be reduced and removed from the Government, it seems probable that many will need debt advice. Schemes such as the banning of bailiff-enforced evictions, for example, are starting to be tapered back to pre-pandemic times. Those who have managed to cope so far may find it increasingly difficult to do so in the not too distant future.
The overall impact on debt levels
Spare cash has meant some can pay down debt. In fact, from the beginning of March until October 2020, a massive £15.6billion in consumer credit was repaid. Additionally, other financial assets either went up or were not affected in any way. Pension payments were uninterrupted. UK Finance has found that repayments on credit cards outweighed the amount being lent. This reflects the situation of those who fared financially well throughout the pandemic. Their income has not been reduced, and their outgoings have been much minimised.
But while that paints a rather rosy picture, it is sadly not the full one. On the other side, many were either already struggling financially or at least financially vulnerable. The pandemic pulled the latter group into a place where their financial health is even worse. Many lower-income families found themselves in this position. They were more likely to be in a situation where their income was cut or even made redundant.
Additionally, many saw their expenditure increase. Outgoings went up with more time spent at home, pushing food bills and energy consumption up. The Trussell Trust reported that almost half of those using their food banks in Summer 2020 were in debt. However, people owed that debt to the Department for Work and Pensions. Many found that their debt had arisen from overpayments of benefits. The trust also reported a general increase in the number of people using their food banks.
While the Government set up many income support schemes to help as many as possible, it could not help all. Such findings of The Trussell Trust go to support this as well as research by Legatum Institute. The institute claims that the number of people living in poverty had risen by almost 700,000 in 2020. Reasons for such a rise and need for food banks were that income support schemes did miss many people. If individuals had just started a new job before 19 March 2020, they would not have been eligible for the furlough scheme. Some recently self-employed people were not eligible for SEISS. Additionally, those where their self-employed income was less than half of their take-home pay also were not eligible. Those on short term contracts, on parental leave, or small limited company directors also saw their incomes massively reduced but not bolstered by SEISS.
As this touches so many different types of people, the Money and Pensions Service expects that there will be an increased demand for debt advice. However, it also expects an increase in complexity. Research from the Standard Life Foundation backs this up too. It believes that 3.8 million adults are now on a reduced income due to the pandemic but are not getting Government support. Half of these are thought to have lost over a third of their household income. Amongst this group, a massive two-thirds are thought to be finding it tough to pay bills. A third is already falling into arrears.
Debt levels rose after the first lockdown in 2020, and The Money and Pension Service found many have seen their debt rise to pay for essentials. 54% of the lowest-income working-age families, according to the Resolution Foundation, need to borrow to meet everyday living costs.
The result has been that, by December 2020, 9 million people have been forced to borrow money. According to the ONS, that was done through formal or informal channels and solely because of the pandemic restrictions. People borrowing more than £1000 increased from 35% to 45% since the beginning of June 2020. StepChange's research is more worrying still with its estimates of debt. It believes that total debt - directly related to Covid-19 restrictions - now amounts to £10 billion.
However, it is essential to remember that Government support schemes have managed to keep that number this low. Without it, the amount of debt in the country would be far higher. However, people are also choosing to cope with debt in other ways. Mortgage payment deferrals have gone up along with credit card deferred repayments. While it is good that people can take such action, it does also mean that the debt is still there and is only dormant for many.
Other such instances of where debt has been allowed to build up is in the case of rent arrears. While eviction bans have meant a roof has stayed over the head for many, their debt burden has increased. Many people have fallen into rent arrears due to a reduced income. Yet, that income was what they had based their rental decision on.
Additionally, in terms of housing, repossessions have also been deferred. While those will inevitably jump just after the ban has lifted, that is not necessarily an impact of Covid-19 restrictions. Many mortgage repossessions would have been in the running before lockdown. Now they will only be carrying out what would have happened back in March or April. UK Finance, however, believes that if the labour market is poor over the next couple of years due to the Covid-19 impact, repossessions will go up.
The impact of Covid-19 on debt in different groups
While the death rate of Covid-19 seemed to disproportionately affect the elderly, the same cannot be said of debt levels. Sadly, the pandemic exacerbated and exaggerated already vast inequalities in financial health across age groups. Different demographics saw their debt burdens change in different ways. As stated before, those in higher-income households managed to pay down debt - like mortgages or car loans. However, the following groups have seen their debt burden rise.
Ethnic minorities, in particular those in black communities, have been financially hard hit by the pandemic restrictions. Individuals from this group are far more likely to work in a sector hard hit by Covid-19. The Money and Pensions Service report asserts that a third of Bangladeshi men work in catering or restaurants. At the same time, one in seven Pakistani men works in a taxi or chauffeur service. Such businesses all but stopped during lockdown restrictions. The result? Those individuals will have inevitably seen their income reduced or become unemployed. Consequently, ethnic minorities are far more likely to get into debt or more debt due to loss of income.
Women have been disproportionately affected by the pandemic in comparison to men. A report by the Women's Budget Group asserts that women make up the lion's share of people using debt as a means to buy essentials. 61% of those getting into debt by purchasing everyday items were women. The reason will be that women tend to work in lower-paid jobs. Therefore, they are far more sensitive to any cuts in pay or increased expenditure.
Those with mental health problems
Many people will have found their mental impact hit by the Covid-19 restrictions. However, that can have worrying financial ramifications too. Those with mental health problems are more likely to get into debt than those without. Lockdown and Covid-19 produced a situation where maintaining mental health was difficult. That will therefore increase the number of individuals missing payments. And, as financial matters are one of the chief reasons people start to suffer mentally, a vicious circle has been created. Last May, the Mental Health Foundation reported that about a third of all UK adults were worrying about their finances - including debt.
Those with disabilities
Those with disabilities are far more likely to go into arrears over unpaid bills. Citizens Advice Cymru found that disabled people living in Wales were 'three times as likely to have fallen behind on a bill since the start of the pandemic'. What has made matters worse is the increased likelihood of redundancy. One in six people (according to Citizens Advice) have faced redundancy in the wider population. For disabled people, that goes to one in four.
Debt and Covid-19
Like Covid-19's ability to mutate and affect more people, debt during the pandemic has had a similar journey. More people and more people are sliding into the financially vulnerable or struggling group. As a result, their debt burden increases. Sadly, as can be the case with some debt, getting out of it becomes more and more difficult. Plus, the problem is that there are still more issues that will rear their ugly head - even when restrictions are totally lifted. Those in rent arrears or behind on mortgage repayments may not be legally in trouble now - but they may well be. And, with unemployment at its highest, getting out of debt will be troublesome for vast numbers of people. Sadly, no one has yet invented a vaccine for that!