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The cost-of-living crisis: why the Government should act now to prevent a tipping point for problem debt

StepChange Debt Charity briefing

18 March, 2022


UK households face prices rising at their fastest rate for 30 years i, with energy bills alone up 54% this April, with concerns that they could hit an average of £3,000 ii in October. At StepChange, we know that not being able to keep up with bills can be the trigger for a downward spiral into severe problem debt.

Even before the current cost-of-living crisis, the coronavirus pandemic had increased financial vulnerability to shocks iii and caused record numbers of people to struggle with the costs of food iv, energy v, and other priority bills vi. Without further action from Government, these acute pressures on low-income families threaten to hold back economic recovery and drive down living standards for months and years to come.

The Government has a responsibility to do more to protect people from the cost-of-living crisis – a crisis that is likely to be exacerbated by war in Ukraine. While the Government’s initial support in February was welcome, the risk now is that it is completely dwarfed.

Action from Government should include support for households most at risk from harm, including expansion of the warm home discount scheme to provide targeted help with energy bills; greater forbearance and support for people struggling with energy debt and arrears; and uprating benefit levels to keep pace with current price rises. This is vital help to protect people from the scars of debt and destitution and would provide a strong anchor of support.

Households face unprecedented rises in energy bills

Energy bills are set to rise by 54% this April, with experts predicting standard fuel bills of £3,000 by October just as people use more energy to heat their homes vii. The impact of energy price rises threatens to result in increased debt and destitution, hungry children and cold homes. Our modelling suggests around £1 in every £6 spent by the poorest households will be swallowed up by energy bills from October, more than double the amount nowviii. Among low-income households, families with children, lone parents, and people with disabilities are most at risk from harm ix.

Rising household debt has increased financial vulnerability to shocks

Many households go into the current crisis under enormous pressure already from the uneven financial impact of coronavirus. Over 3 million people ran down savings to make ends meet during the pandemic, and StepChange found widening financial vulnerability among people who lost jobs or lost income x. Even before April’s rise in energy bills:

  • 11 million people have built up £25 billion of coronavirus-related debt, making them less financially resilient to shocks xi.
  • Over 4 million people are using credit to pay for essential bills and stuck in harmful, desperation borrowing xii.
  • One in five GB adults (21%) are worried that the cost-of-living and energy bill price rises this year will drag them into debt they simply cannot pay back xiii.

Energy debts are on the rise

Energy arrears are a key indicator of unaffordable bills and coming into the current crisis, one in ten UK adults were already behind on electricity and gas bills xiv. StepChange has also seen a significant increase in the proportion of clients seeking help with energy debts. Around one in three bill payers (29%) coming to the charity for help have fallen into arrears on electricity and gas, up from one in seven before the pandemic. Among our clients, the average amount owed was already on an upward trend, up from £1,056 to £1,399 in the two years to 2021 xv.

Our modelling of the impact of the projected October bill rise suggests the number of client households tipped into a negative budget will double as a result, from around a quarter of clients to more than half (56) who are unable to cover the essentials xvi. Our data covers 170,000 new clients in 2021 and provides an early warning sign of the financial distress that such steep bill hikes are likely to cause among people in the lowest income quintile.

Fuel poverty is set to widen and deepen

Among those most affected by rising prices are the additional 2 million households set to be pushed into fuel poverty as a result – bringing the total to 6.5 million xvii. The widening and deepening of financial distress, and the impact of rising energy bills on mental and physical health problems, are key reasons why the Government should act now to support families with the cost-of-living before unprecedented price rises feed through into lasting harm.

Households need more support to cope with rising prices and energy costs

The Government announced measures in February to support people with rising energy bills. These included a one-off council tax rebate for 80% of households in April, and a £200 energy loan to households in October, to be paid off over the next 5 years.

While this support is critical, the cost of food and energy is increasingly out of reach for low-income households. StepChange believes renewed action is now needed, with a focus on protecting households most at risk of harm.

The Government should act now to prevent growing hardship in the coming months

Uprate benefit levels by 7% inflation: It cannot be right that the poorest households face a real terms income cut of, on average, around £500 xviii amidst the most significant rises in food and energy prices in a generation. Inflation has risen dramatically since the September figure for CPI that the Government will draw on for uprating benefits in April. The Government should instead move to uprate benefits by at minimum 7% inflation to keep up with Bank of England forecasts and ensure the poorest households aren’t left adrift as bills continue to rise.

Stronger energy bill support: This should include expanding the Warm Home Discount (WHD) scheme so that all people on means-tested benefits and pension-credit are automatically supported with their fuel costs. This would treble the reach of the scheme, and importantly ensure take-up. The WHD was worth £140 last year, and crucially should be significantly increased by Government in line with modelling of expected price rises in 2022-23 so as to temporarily double its value.

Better forbearance: Ministers should look urgently at what more they can do to help people in debt. This should include suspending energy company recovery of debt from people who can’t afford their bills, in particular ending the use of high court bailiffs – and an emergency pause on the DWP’s programme of benefit deductions (as happened during the pandemic) to help people with energy and other debts, providing support for some 3 million of the UK’s poorest households xix.

Investment in local crisis support: The Government rightly scaled up local crisis support during the pandemic through investing £500m in the Household Support Fund. Those kinds of pressures are not over, so Ministers should urgently provide similar scale of investment to local authorities so they can support people with vouchers, grants or discretionary payments to cover essential bills.

For more information, please contact Mark Haslam, Senior Parliamentary and Public Affairs Officer, StepChange Debt Charity, on 07890 111 214 or mark.haslam@stepchange.org.


i The Living Standards Outlook 2022, Resolution Foundation (March 2022). Someone with average direct debit use paid £1,277 for their energy bills in February. What is the energy price cap?, MoneySavingExpert (Feb 2022)

ii Ibid, and 'Household bills could rise to nearly £3,000 per year warns Cornwall Insight', CityAM (2 March 2022)

iii FCA finds the Covid-19 pandemic leaves over a quarter of UK adults with low financial resilience, Financial Conduct Authority (Feb 2021)

iv 'Record 2.5million food parcels distributed last year', Trussell Trust (April 2021)

Red alert- Households face enormous pressures in build up to energy price cap rise, Citizens Advice (Feb 2022)

vi Getting ahead on fall behind: tackling the UK’s building arrears crisis, Resolution Foundation (Feb 2021)

vii 'Household bills could rise to nearly £3,000 per year warns Cornwall Insight', CityAM (2 March 2022)

viii StepChange modelling of estimated annual energy bills of £3,000 on the household budgets of 170,000 new clients in 2021.  Up from £1 in every £14 at the moment. Client incomes are representative of the lowest income quintile among the UK population and have been adjusted for expected wage and benefit rises this financial year. Our client’s average monthly energy costs were £111 in 2021, by April’s rise this is expected to be £172, and then £252 by October.

ix'400,000 people could be pulled into poverty by real-terms cut to benefits in April', Joseph Rowntree Foundation (Feb 2022 - source no longer available);  'Support on energy bills is "strange, complicated and untargeted", says Citizens Advice', Citizens Advice (Feb 2022)

x Falling behind to keep up: the credit safety net and problem debt, StepChange (Jan 2022)

xi Covid debt rescue: emergency support for renters to keep their homes, StepChange (March 2021)

xii Falling behind to keep up: the credit safety net and problem debt, StepChange (Jan 2022)

xiii Forthcoming research, YouGov PLC for StepChange, total sample size 1,676 adults, research conducted 11-13 March 2022.

xiv Op cit, Citizens Advice

xv StepChange client data, 2019-2021

xvi StepChange modelling. A negative budget is where a debt adviser judges that a client cannot afford their living costs. This is assessed using the Single Financial Statement, a cross-industry tool with guidelines on fixed costs, such as rent, and flexible costs such as food. A negative budget is where after key expenditure the client has £0 or less left over.

xvii Energy crisis: when the price cap is raised in April, 2 million more UK households could be plunged into fuel poverty, totalling 6.5 million, National Energy Action (Jan 2022)

xviii Op cit, Joseph Rowntree Foundation

xix Joint Meeting of APPG on Ending the Need for Food Banks and APPG on Personal Debt and Finance on Destitution, Debt and Deductions (Feb 2022)