Written evidence from StepChange Debt Charity (CPM0038)

Introduction             

StepChange Debt Charity is the largest specialist debt advice charity operating across the UK. In 2019, over 630,000 people contacted us for advice and information on problem debt. We welcome the opportunity to submit evidence to the Work and Pensions committee inquiry on children in poverty.

Executive Summary

This submission primarily makes the case for the inclusion of debt in measures of child poverty:

• Debt repayments have a large impact on a family’s disposable income levels. Debt can significantly reduce the ability of parents to meet their basic needs and those of their children, thereby compounding the experience of poverty. We therefore propose that existing income-based poverty measures be supplemented by further measures which account for debt repayments in their assessment of incomes, such as that developed by the Social Metrics Commission.
• There should also be greater reporting of existing data on problem debt. When parents are faced with problem debt, it can have a serious detrimental impact on the living standards of their children. Children are often aware of the problems their parents face which forms a key part of the lived experience of poverty.
• The impacts of problem debt on children closely resemble the impacts of child poverty. This is because the financial stresses caused by problem debt are similar to, and often compound, the problems caused by poverty. Parents in problem debt often have to cut back on support for their children. These periods of severe hardship can have a real impact on the mental and physical health of both parents and children. They can undermine children’s relationships with their peers and their school experiences. Some of these impacts risk having an on-going effect that lasts throughout the child’s life.

We also call for greater coherence in cross-government policy relating to child poverty and problem debt:

• Persistent poverty among families with dependent children is a central driver of demand for unaffordable credit. However, cross-government policy to support those in, or at risk of, poverty to meet unpredictable or unexpected essential costs remains fragmented. We would like to see the Department for Work and Pensions (DWP) better align its policy to meet poverty reduction and financial inclusion objectives.
• DWP should review the operation of budgeting advances within Universal Credit (UC) so that they are better suited to the needs of households with low incomes through more flexible borrowing and repayment terms.
• The department should also ensure that UC payments are both adequate and sufficiently stable to meet minimum living costs without claimants being forced to resort to using credit to make ends meet. In addition, the system of deductions from UC should be overhauled, amending legislation and regulations where necessary, to implement best practice standards in responsible debt collection including effective affordability assessments.
• The limitations of national policy are likely to increase burdens on, and undermine the effectiveness of, local crisis support schemes that are primarily designed to meet the needs of those facing crisis in exceptional circumstances, such as (beyond the present Covid-19 pandemic) those fleeing abusive relationships or leaving institutional care. Following the pandemic, DWP should seek to build on the Covid Winter Grant by developing a coherent national and local policy framework that addresses both the widespread need for grants and affordable credit to reduce poverty and the specific needs of local crisis support services.

How should child poverty be measured and defined?

Poverty means lacking the necessary resources for a decent standard of living. The measurement of poverty thus rests on what we understand to be a decent standard of living and how we measure resource in relation to that. While there is no one universally accepted measure of poverty, there are a number of widely used measures each of which provide differing insights into the experience of poverty.

Income-based measures of poverty

The most commonly used indicators of poverty are income-based measures which assess a household’s level of income against a defined poverty line. In the UK, this is typically 60% of median income. Whether the poverty line should be absolute (i.e. remain fixed over time) or relative (i.e. change year-on-year to reflect shifts in the general standard of living) is hotly debated. Other typical considerations when assessing income-based measures of poverty hinge on what we include in our assessment of household incomes.

The Department for Work and Pensions (DWP) currently publishes four income-based measures of poverty in its annual Household Below Average Incomes (HBAI) statistics.[1] These include two sets of absolute and relative poverty measures, one measured before housing costs and the second after housing costs. Accounting for housing costs when assessing income levels provides a better reflection of disposable incomes (i.e. how much money families have to live on after certain non-negotiable expenses have been met). It also captures large regional variations in housing costs, which are important to consider when thinking about government policy to tackle child poverty.

We support the continued publication of the four existing poverty measures which enable comparisons over time, as well as international comparisons. We also propose that these measures can usefully be supplemented by measures that include an assessment of required debt repayments. As with housing costs, debt repayments have a large impact on a family’s disposable income levels. Debt can significantly reduce the ability of parents to meet their basic needs and those of their children. Families struggling with debt repayments often face an impossible choice between buying necessities, such as food or clothing, and meeting obligated payments.

Research from StepChange finds that parents facing problem debt are often engaged in a juggling act, caught between making payments on debts, buying essentials, or cutting back.[2] One mother spoke of the ‘short week’ each month when the cost of sanitary products for her daughter affects what she has available for food. Other families have to weigh up similar choices about spending money on food or buying things for their children.

‘If we get a letter back like [about a school disco], I think we can just about afford that, but it means we won’t have any bread and milk over the weekend. We’re always having to juggle everything around so that these guys can get out and live their lives.’

Work by the Social Metrics Commission (SMC) has sought to improve the measurement of poverty to better reflect the resources available to families.[3] In addition to housing costs, the poverty measure devised by SMC takes account of other inescapable costs, such as childcare and the extra costs faced by those with disabilities. The Commission proposes the inclusion of obligated debt repayments in its poverty measure, subject to the availability of relevant data, noting that ‘Where families have accumulated debt and are obligated to pay this back based on a repayment schedule, the resources that go towards meeting these debt repayments are not available to spend on the day to day consumption.’[4]

We agree with this approach and understand that, following a commitment by the DWP, data on debt repayments will be available in the 2020/21 Family Resources Survey (FRS). We welcome the inclusion of a detailed measure of debt in the FRS and believe that this, combined with the inclusion of debt in SMC’s poverty measure, will greatly enhance our understanding of the dynamics of poverty and debt in the UK. We must stress that we see the SMC measure and any additional measures that account for debt as complementary to, rather than a replacement for, existing statutory child poverty measures.

Material deprivation and the lived experience of poverty

In addition to data on debt levels, it is useful when assessing poverty rates to understand the incidence of problem debt. Problem debt refers to instances in which people struggle to manage the debt that they owe. This element of struggle forms a key part of lived experience of poverty and is often linked to material deprivation. In fact, those who experience problem debt are more likely to also experience other forms of material deprivation. For instance, recent research from StepChange found that 30% of our debt advice clients had had fewer than two meals a day for two or more days in the past month and that 19% of clients had lacked appropriate clothing or footwear for the weather.[5]

The continued inclusion of a question on the ability to repay bills in the FRS’s suite of material deprivation indicators for adults and pensioners,[6] shows that the DWP already recognises the role of problem debt in the lived experience of poverty. It is also reasonable to exclude the question from the suite of indicators used for children as they do not directly experience problem debt in the same way as adults. However, our research on the impacts of debt on families with children shows that, when parents are faced with problem debt, it can have a serious detrimental impact on the living standards of their children. For instance, our figures show that nine-in-10 parents in arrears on at least one household bill or credit commitment had cut back on necessities for their children in order to make a debt repayment in the past year.[7] Moreover, children are frequently aware of the problems their parents face in paying for their needs. Almost 54% of children with families in arrears said that their family did not have the money to buy all the things they need. This compares to 22% of those in other families.[8] For these reasons, we believe that is important when discussing child poverty rates to also be aware of the proportion of children growing up in families experiencing problem debt.

The FRS does include data on bills in arrears, which enables us to identify households experiencing some indications of problem debt. The bills included are electricity, gas, other fuel, Council Tax, insurance, telephone, television or video rental, hire purchase, water rates, rent, mortgage payments and other loans.[9] However, the FRS excludes other types of credit such as debt incurred on store cards, mail order payments and informal loans from friends or family. FRS data has previously been used to highlight the association between low income and problem debt[10], but it is not widely reported on and the exclusion of certain debts means that it may not capture the full extent of problem debt among families in the UK.

Given the implications of problem debt on household finances, as well as its impact on the lived experience of poverty among children and adults, we recommend that a greater emphasis is placed on the incidence of problem debt among families with children and that efforts are made to improve the measurement of problem debt so that we can more accurately understand the problem. In addition, regular reporting on child poverty rates should be accompanied by reporting on problem debt among families with children to inform and support policy development.

What is the impact of child poverty and how can it best be measured?

What links can be established for children between financial hardship, educational under-achievement, family breakdown and worklessness?

In 2014, StepChange worked with The Children’s Society to better understand the impact of problem debt on families with children.[11] Parents in problem debt often go to extraordinary lengths to stretch what they have in order to prevent children missing out on the very basics. However, sometimes this simply becomes too hard, and families have to cut back on support for their children. These periods of severe hardship can have a real impact on the mental and physical health of both parents and children. They can undermine children’s relationships with their peers and their school experiences. Some of these impacts risk having an on-going effect that lasts throughout the child’s life.

The emotional impact of problem debt

The pressure associated with financial hardship can cause emotional problems for parents and children alike. In our research almost all (95%) parents in arrears said that their financial situation caused them emotional distress, and this often had a knock-on effect on their children.[12]

‘[My son] has also seen me at times when I’ve been upset and he doesn’t cope well [when I’m] upset. So I think […] sometimes he probably doesn’t talk about things because he doesn’t want to see me getting upset.’

Around half of parents (47%) in arrears, said that their financial situation caused their children emotional distress, with a quarter saying that it resulted in their children feeling stressed or anxious and 19% saying that it contributed to them having mood swings.[13]

When we asked the children in families with problem debt for their perspective, 58% reported feeling worried about their family’s financial situation. This compares to 31% of those not in arrears.[14] Similarly, children interviewed also showed a keen awareness of how debt was impacting their family.

‘It just makes me feel stressed because sometimes she puts it onto me […] Like she will get angry at me for silly little things, little things.’

‘I would rather not know the details. I would rather just help my mum get through it’

The impact of problem debt on relationships with family and friends

Problem debt can have a severe impact on family relationships. In our work with families in problem debt, we found that among parents who had arrears at least one bill, 57% said that their financial situation had led to their current or most recent relationship being put under strain. 7% said it led to their most recent relationship breaking up. Children themselves see the impact of debt on family relationships. Almost 47% of children in families in arrears said that lack of money caused arguments in their family, compared to 21% of those not in arrears.[15]

Family debt can also have a significant impact on children’s relationships with their peers. This is often caused by children being unable to afford things that are normal for others, such as transport or social activities.

‘If money was no object then one thing I would love to get is a bus pass […] I haven’t got one, so I am just stuck in [name of town] twenty-four seven […] I think it’s a £100 now for a bus pass […] Every single one of my friends have a bus pass.’

‘A couple of friends can go to the cinema quite often and some can go ice skating quite often. And I have loads of friends who do a lot of sport, like figure skating stuff […] and I’ve come to realise that you do need to pay quite a lot of money to do that.’

Around 51% of children (aged 10-17) in families in arrears said that that had felt embarrassed because they did not have the same things their peers had, compared to 26% of those not in arrears. Similarly, 19% of children in families with problem debts said that they had been bullied for this reason, compared to 9% of those not in problem debt.[16] There is strong evidence about the links between bullying and children’s well-being. Data from the ONS shows that children who were bullied frequently were 4 times more likely to report poor mental health.[17]

The impact of problem debt on children’s school experience

The experience of debt can have an impact on children’s school life, either because their family cannot afford the items they need to get the most out of school, or because worries about debts affect their learning. Over a quarter (28%) of parents with problem debts told us that they thought that their financial situation made it harder for their children to participate in educational activities. Around one in five (18%) said they thought it made it harder for them to concentrate in school, 15% that it made it harder for them to complete their homework, and 17% said it meant they were less able to form positive relationships with their peers.[18]

Much of the reason for this is likely to be associated with the difficulties families in problem debt have with paying for the costs of education. Nearly two thirds of children in families with problem debts said that they found it hard to pay for school activities or educational materials at least sometimes – compared to one in four other families.[19]

‘When I first got into secondary school, it’s got progressively more tough because of the requirements, and we need to pay for things like my sketch books for art and tech […] the money was being stretched quite far, and, like, I started realising then that I couldn’t keep asking for those things.’

This can result in a negative relationship between problem debt and children’s feelings towards their school experience. A quarter (24%) of children in families with problem debt were unhappy with their school in general, compared to 14% of those not in problem debt.[20]

The links between childhood poverty and poor educational outcomes are well established. For example, research finds young people from low-income households end up leaving education earlier and are around six times more likely to leave without qualifications than those from higher-income households.[21] Other research cites a lack of resources that diminishes the ability of families to support young people with educational material, as a contributory factor.[22]

The pressures of maintaining debt repayments places children with indebted parents in a similar position. Our research found that the pressure of maintaining repayments on debts contributed to 45% of indebted parents cutting back on educational materials for their children, and around 84% cutting back spending on social activities for their children over the previous 12 months.[23]

The impact of problem debt on children’s social life and leisure activities

Alongside the impact on their school experiences, problem debt can have an impact on children’s ability to participate in social and leisure activities.

‘I like to go out with my friends quite often, and to do that I need a fiver or something to get on the bus home, and maybe some food while I’m out. But I’ve sort of like stopped going out with my friends quite recently because a fiver is bread and milk money.’

‘[My little sister] once went to karate for a bit […] but we couldn’t afford to keep her there, so she didn’t do it. And like her friends have clubs and stuff that she can’t go to.’

It also prevents families from doing things together such as going on day trips to museums or cinemas.

‘Most of what we do in terms of socialising, it tends to be in the house, we don’t tend to go off to museums or go to the cinema or that kind of stuff. And they tend to only ever go out on trips where we’ve sort of saved up many months to go.’

Keeping up with debt repayments had meant that 84% of parents had cut back spending on social activities for their children over the previous 12 months, and 32% had found themselves having to do so every month.[24]

Our findings show that children are often aware of the difficulties faced by their parents when paying for social activities. Almost three-quarters (63%) of children whose parents were in arrears said that their parents found it hard to pay for their social activities. This is compared to 27% of those whose parents were not in arrears.[25] The effect of this appears to have a worrying impact on a child’s life. Around 25% of those who perceived their parents to be cutting back spending on their social activities agreed that they ‘wish they had a different kind of life’, compared to 8% of those who did not believe their parents had cut back.[26]

In many respects our findings on the impacts of problem debt on children closely resemble the findings of those researching the impacts of child poverty. This is because the financial stresses caused by problem debt are similar to, and often compound, the problems caused by poverty. For this reason, we believe that accounting for debt in income-based measures of poverty and the reporting of the incidence of problem debt are vital to understanding and addressing the problems faced by low income families.

How effectively does the Department for Work and Pensions work with other Government departments, particularly the Department for Education and the Treasury, to reduce child poverty?

As a free debt advice provider, StepChange has noted a lack of coherence in cross-government policy relating to child poverty and problem debt. In 2017, the government established the HM Treasury-led Financial Inclusion Policy Forum. The forum, which reports annually[27], seeks to ensure that all individuals, regardless of their background or income, have access to useful and affordable financial products and services. It has contributed to positive progress in a number of areas such as the creation of Fair4All Finance using dormant assets funding. However, persistent poverty among families with dependent children is a central driver of demand for unaffordable credit and cross-government policy to support those in, or at risk of, poverty to meet unpredictable or unexpected essential costs remains fragmented.

Despite the DWP’s involvement in the forum, budgeting advances within Universal Credit (UC), which provide a potentially valuable source of no-interest credit, are poorly designed to meet need, with excessively restrictive eligibility criteria unrelated to affordability and inflexible repayment terms. This failure to join up policy diverts financially vulnerable social security claimants to high cost credit that often leads to over-indebtedness and compounds poverty. This also works against the DWP’s wider objectives, such as supporting people into work, because those struggling with debt problems are more likely to experience difficulty seeking work due to factors such as stress, anxiety and health problems, and concerns about the impact of additional income on debt repayments.

StepChange noted in a 2020 report, Problem Debt and the Social Security System,[28] how the wider design of social security can itself cause or compound debt problems among those at risk of poverty. This includes notably the five-week wait for UC but also wider issues including unaffordable deductions from payments to repay non-priority debts, unpredictable fluctuations in support, and administrative delays and errors. At the time, national polling commissioned to support the work indicated that 43% of those receiving working-age social security support had used credit to pay for essentials in the last year, highlighting the importance of integrated affordable credit and social security policy.

We would like to see the DWP better align its policy to meet poverty reduction and financial inclusion objectives:

• DWP should review the operation of budgeting advances within UC so that they are better suited to the needs of households with low incomes through more flexible borrowing and repayment terms. This could include removing restrictive eligibility criteria unrelated to affordability, allowing multiple loans (up to a maximum amount), introducing payment breaks and extending the maximum repayment period to at least 24 months. The Department should also consider establishing national grant support for those facing essential costs who cannot afford to repay a no-interest loan.
• More generally, DWP should ensure that UC payments are both adequate and sufficiently stable to meet minimum living costs without claimants being forced to resort to using credit to make ends meet. It should also overhaul the system of deductions from UC, amending legislation and regulations where necessary, to implement best practice standards in responsible debt collection including effective affordability assessments. The Cabinet Office’s work to develop a cross-government debt management strategy and the roll out of the Breathing Space and statutory debt management plan schemes offer an opportunity for the Department to review its approach and implement changes.
• Through the Covid Winter Grant, which is primarily targeted at families with children, DWP recently took greater responsibility for local crisis support policy. Local welfare assistance schemes typically include grants or loans to help those facing financial crisis meet essential costs such as the replacement of appliances. The limitations of national policy are likely to increase burdens on, and undermine the effectiveness of, local crisis support schemes that are primarily designed to meet the needs of those facing crisis in exceptional circumstances, such as (beyond the present Covid-19 pandemic) those fleeing abusive relationships or leaving institutional care. Following the pandemic, the Department should seek to build on the Covid Winter Grant by developing a coherent national and local policy framework that addresses both the widespread need for grants and affordable credit to reduce poverty and the specific needs of local crisis support services.

March 21