Understanding the financial situations of people with government debts

Posted November 12, 2020

In the second in this series of blogs on our new ‘Levelling up’ report, the Trust’s Public Affairs and Policy Manager Grace Brownfield explores the financial situation of National Debtline and Business Debtline clients with government debts.

Last week, I blogged on how government debt collection practices compare to those in the private sector (spoiler alert: not well). There is a growing body of evidence – of which our recent Levelling up report is just the latest – that government organisations lag well behind best practice when it comes to fairness and affordability in debt collection.

The reason this issue is so important is because of the impact collection practices have on people in debt. As part of developing the Money Advice Trust’s response to the Cabinet Office’s call for evidence on fairness in government debt management (and subsequently our Levelling up report), we analysed data for groups of National Debtline and Business Debtline clients to compare the situation of those with government debts to those without. As I explore here, the results showed just why affordability must be at the heart of government debt collection.

Lower incomes and tighter budgets

One of the starkest reflections that jumps out from the analysis is the comparatively more difficult financial situation our clients with government debt are facing. National Debtline clients who owed debt to government had lower monthly incomes, receiving an average of £186 less than those who did not owe any government debt.

Unsurprisingly, this impacts upon people’s ability to afford their bills. Clients with government debts were more likely to have a deficit budget meaning they did not have enough money coming in to meet their essential costs. 43% of clients who owed debt to government had a deficit budget, compared to 31% of those who did not have government debt.

This tells us that those with government debt face particular affordability challenges when it comes to repaying. Assessing affordability properly, and being willing to accept affordable offers of payment are therefore particularly important. Given the tightness of the budgets of people with government debt, pressure to repay large amounts of debt in one go are likely to be particularly harmful.

Priority debts dominate their debt burden

National Debtline clients with government debts have, on average, a higher number of debts, particularly when it comes to ‘priority debts’. These are the debts (including government debts) with the most severe consequences for non-payment, and ones that can be particularly hard to deal with if all priority creditors – including government organisations – do not take a fair and affordable approach to recovery.

The fact that people with government debts typically owe a greater number of different debts makes it all the more important that government creditors take a holistic view of a person’s situation when setting repayment terms, something we unfortunately often don’t see.

“Where multiple debts exist different government bodies do not take account of debts owed to others when setting repayment terms.”

Debt adviser surveyed by the Money Advice Trust

People with government debts owed an average of £3,013 more on priority debts than those without. Interestingly, we found that this was often driven by large benefit overpayment debts, suggesting these can be a significant part of people’s debt issues. As we highlighted in our report, many outstanding benefit and tax credit overpayments were incurred several years ago, and the re-appearance of these historical debts at a later date can raise significant issues for people.

Interestingly, National Debtline clients with government debts owed less when it came to non-priority debts (typically consumer credit debts). This is to be expected given their lower incomes and would likely reflect that they would find it more difficult to access credit. However, what these findings once again highlight is just how crucial the approaches of priority creditors, including local and central government organisations, are to the resolution of people’s debt problems.

Government collection practices critical to personal – and business – recovery

The picture is similar for Business Debtline clients. Those with government debts have, on average, a higher number of personal debts. They owe larger amounts of priority debts, by an average of £1,923. As with National Debtline clients, this is often driven by the debts they owe to government - particularly income tax or benefit overpayment debts.

For our Business Debtline clients, there is the added complication that they are managing not just personal finances but business finances too. People with debts to government have a higher amount of business debt, owing on average £6,576 more.

Our previous research has shown that, often, the personal and business finances for many self-employed people and sole traders are intrinsically entwined. This means that the way government departments collect debts – particularly any business debts owed to HMRC – is critical not just to people’s personal finances but to the viability of their businesses and whether these can withstand a period of financial difficulty. In light of the impact of Covid-19 on many small businesses, this will be more important than ever.

“The system is too rigid and absolutely fails business owners. There is no empathy, letters by quantity and tone feels harassing. There is no consideration about personal income versus ability to pay.’’

Business Debtline caller

Embedding affordability across government collections

If government is serious about helping people out of debt – as opposed to just getting debt out of people – then urgent change is needed. As we’ve set out here, the financial situation of those owing government debts makes it even more imperative that government embeds best practice on affordability throughout its collection activities. As we set out in our new report Levelling up: The case for reforming government debt collection, this should include:

• All government creditors adopting the Standard Financial Statement
• Taking steps to make it easier for people to make affordable arrangements to pay
• Introducing a single view of debt across departments
• Piloting a ‘Help to Repay’ payment matching scheme.

The Cabinet Office’s call for evidence is a welcome opportunity for government to take action. Levelling up government debt collection practices has been a long time coming – and, as our analysis shows, the people we help cannot afford to wait any longer.

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*We analysed a sample of 365 National Debtline clients and 504 Business Debtline clients who contacted the services between March – April 2020, for whom we had full income and expenditure data, to compare the situation of those who had at least one debt to a government organisation against those who had no debts to government organisations.

This is the second in a series of blogs on the Money Advice Trust’s evidence on the impact of government debt collection practices, exploring current issues and setting out the changes needed. Read our full report.

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