Debt is not intrinsically good or bad. It can be used to maintain household consumption while income is temporarily low, or to bring forward the consumption of a good, such as taking out a mortgage to buy a home. Debt-facilitated transactions make up a large proportion of economic activity, with supporting regulations in place to ensure products are competitive and reduce risk for consumers.

Most people with debt do not experience major problems repaying it. However, when debt or repayments become unsustainable, it can drive worsening mental and physical health. And when health or employment circumstances change, it can make people’s ability to cope with existing debt harder or lead to people taking on new debt. As this long read explores, there is a strong relationship between debt and health. Debt problems can weigh on people’s mental health and the stress can harm physical health as well. Poor health can lead to debt becoming unmanageable, through higher costs or loss of employment and income.

There was a risk during the pandemic that personal debt problems could spiral out of control. Action such as the furlough scheme and increases in Universal Credit, as well as mortgage and debt repayment holidays, prevented this from materialising for most. However, as these support measures are removed and given the future path of COVID-19 remains unpredictable, there is a risk that debt problems could resurge. This may not be in the form of a ‘big bang’ increase in debt but a steady increase as people try to cope in difficult times, leaving people at greater risk of ‘problem debt’ (see Box 1) if their circumstances change, or there are further external shocks either through the labour market or to prices. This may particularly be the case for those who have struggled financially during the pandemic through job loss, furlough, or missing out on support (such as many of the self-employed).

Even before the pandemic, there had been a notable change in the composition of debt problems that people sought help with – shifting away from private sector debts towards debts owed to the public sector, such as council tax. In times of difficulty, the public sector has increasingly become a source of debt anxiety instead of relief. Reviewing how the public sector creates and collects debts should be a priority for government, especially after the £20 per week cut to Universal Credit, to avoid creating a further stressful burden on low-income households.

This long read goes on to explore the relationship between debt and health, trends in debt up to and since the pandemic, and policy responses that can reduce the impact of problem debt on health.

Struggling to pay debts can be a stressful experience, potentially affecting both physical and mental health. There is a strong relationship between health and debt. Figure 1 shows twice as many people experiencing problem debt report poor health than those without problem debt.

Among those in problem debt, nearly half have less than ‘good’ health (47%) and 20% have ‘bad’ or ‘very bad’ self-rated health. Among those not in problem debt, 22% have less than ‘good’ health, and only 7% have ‘bad’ or ‘very bad’ health. This relationship remains even if we control for age and income, meaning the relationship is not driven simply by those with problem debt having lower incomes or their age profiles.

How many people struggle with paying debts? There are a range of ways to answer this question: the comprehensive ONS measure, as defined in Box 1, gives around 4% of households experiencing problem debt in Great Britain in 2016–2018. Other measures are broader: for example, 14% of adults report that their debts are a heavy burden.

Based on the measure of problem debt used in Figure 1, those on low incomes who have debt are more likely to be in problem debt than those on higher incomes with debt. 12% of those with debt in the bottom tenth for income have problem debt, compared with 5% in the middle tenth and less than 1% in the top 10%.

Figure 2 looks at what proportion of people in each fifth have debt, and how much of their income is spent on repayments. This provides further insight into the relative size of debt burdens.

The burden of debt and living costs

Whether or not an individual feels that repaying their debt and any additional interest is a heavy burden provides an indicator of the amount of stress or worry their debt is causing them. Figure 3 shows trends in people reporting they feel their debt is a heavy burden between 2004 and 2020, along with a measure of inflation (the consumer price index).

Figure 3 shows that those who felt their debt was a burden was falling in the years leading up to the pandemic and in September 2020. This is consistent with trends in the Wealth and Assets survey, which shows a fall from 7% to 4% between 2010–2012 and 2016–2018. The proportion that consider their debt a burden had previously fallen after the financial crisis (with banks less likely to lend to ‘riskier’ people) and increased during the living standards squeeze that followed the Brexit referendum and the devaluation of the pound.

Figure 3 also shows that the proportion of individuals who feel their debt is a burden has generally risen and fallen in line with CPI inflation from 2004 to 2020. The two have a strong correlation, with an R² value of 0.72, meaning 72% of the variation in debt burden is ‘explained’ by movements in CPI. While eventually we would expect higher rates of inflation to erode the value of debt, it is likely that in the short run squeezed real incomes make debt repayments feel like more of a burden.

Although inflation rates fell during the pandemic, they have been rising since March 2021 and are expected to continue to rise further (shown by the shaded area of Figure 3), as the energy crisis and supply chain problems drive pressure on prices. For individuals, higher living costs can impact on the ability to make debt repayments without feeling financially burdened. There is a risk that inflation pressures – beyond the energy price rise – will lead to a significant rise in people feeling that their debt is a heavy burden in 2022.

For some, the enforcement of debt collection can be a bigger problem than the size of the debt. The potential growth in debt issues among those receiving social security may increase the importance of public sector debt collection, with those on low incomes more likely to owe debts to local or central government. People can be indebted to the public sector for various reasons, including: receiving an overpayment of benefit; receiving a Universal Credit payment advance; or owing a tax bill, such as council tax.

Some have identified a shift in the balance of where problem-creating debts are owed – away from the private sector and towards the public sector. The ways in which these debts are incurred and managed could have a particular impact on health given the likely lower income and worse pre-existing health of those affected.

There are several key issues on public sector debts that have implications for health:

• Public sector policy can drive debt problems. Work from the IFS shows that higher minimum payments for council tax lead to higher levels of arrears as small amounts of money are collected from low-income residents. Work from the New Policy Institute shows how limited local welfare assistance schemes and high minimum payments can also drive poor economic outcomes, such as destitution.
• Public sector debt collection can also be a problem, making the lives of those with debts to the public sector more stressful than they need to be. A House of Commons select committee found public bodies to be ‘zealous and unsympathetic’ in collecting debts, falling behind private sector standards on issues such as escalation and bailiff use. These in particular seem likely to exacerbate the stress experienced by those having debts collected.
• A related issue is third-party payments or deductions, which refers to debts such as council tax or rent being withdrawn directly from benefits to assist those on low incomes with repayment. However, these can often drive a benefit recipient’s income levels to below what is sustainable, with multiple different claims on a recipient’s income. Our freedom of information request shows that in May 2021, 531,000 Universal Credit claimants had at least one withdrawal from these benefits (around 11% of all claimants), and nearly 90,000 had multiple withdrawals from these benefits.

There have been some improvements in how problem debt is managed, with the introduction of Breathing Space in May 2021. Breathing Space provides 60 days of legal protection from debt collection to allow people to get on top of their debts. There is also a version of the same policy for those with mental health problems, protecting people while their treatment lasts plus 30 days.

Statutory Debt Repayment Plans are due to be introduced in 2024 and will enable individuals to repay their debts over a manageable time period, stop the accrual of interest, and pause enforcement action.

These are welcome actions and reflect sustained campaigning from charities and others. However, they are more focused on ameliorating debt problems than preventing debt from becoming a problem in the first place. The success of furlough schemes and increasing social security during the pandemic shows the potential for preventative action in this area – preventing huge drops in economic activity from becoming huge drops in living standards. In the immediate term, preventing an increase in problem debt will require action to reduce the impact of energy price rises. There are different ways of doing this, such as increasing the Warm Homes Discount, but the most operationally straightforward way of doing so is increasing the basic rate of Universal Credit and other working age benefits.

Preventing health and employment shocks from leading to debt problems

Employment loss is one of the key drivers of over-indebtedness, and health can play a role in triggering these issues. A potential way of weakening the link between employment loss and debt could be more generous social security or social insurance, in a similar manner to the furlough scheme as some have argued for – with 80% of earnings paid for several months after job loss, or higher baseline benefit levels. There is also a role for enhanced occupational health support to prevent health problems from leading to employment loss, as well as increasing the generosity of statutory sick pay.

Public sector debt and enforcement

The public sector more broadly needs to think about ways in which it contributes to debt problems through social security design (such as requiring those on low incomes to pay council tax) but also through the layering of third-party deductions from benefits, which can leave people on below subsistence incomes. There is also the question of debt collection in the public sector, which uses bailiffs at an early stage of proceedings and can be aggressive relative to the private sector. The Centre for Social Justice have called for a single customer view, where multiple debts are considered together to prevent deductions from benefits being too large.

Emergency support for one-off situations had been lacking with the end of the discretionary Social Fund and the patchwork nature of Local Welfare Assistance. The temporary reintroduction of similar support in the form of the government’s new £500m Household Support Fund is a part recognition of this. A version of this scheme aimed at larger expenses rather than living costs on a permanent basis, could help reduce those seeking inappropriate debt products to deal with such expenditures.

The end of furlough and the Universal Credit uplift has brought debt into sharp focus, and with the anticipated £750 increase in annual energy bills and inflation expected to reach 6% in April, the coming months are likely to make repayments feel more stressful. This will have consequences for health and wellbeing.

A big bang increase in debt with the unwinding of these measures is unlikely, but as this analysis shows, there are some early warning signs among those receiving benefits – most of whom will be receiving a lower income now that the Universal Credit uplift has ended.

Current policy is developing well in mitigating the consequences of debt problems for those experiencing them. However, preventing problems from arising in the first place will better protect health and avoid starting a potential cycle of health and debt problems. Taking action to offset the impact of rising energy bills should be an immediate priority.