Why Britain could be sleepwalking into a debt crisis

This could have dire consequences for people who have historically struggled to access credit, especially those on low incomes.

The situation also illustrates the dilemmas facing authorities around the world who have taken unprecedented steps to keep societies intact during the pandemic, including requiring lenders to offer customers payment holidays.

However, due to fears people will spiral ever-deeper into debt, leaving banks with deep losses, regulators are paring back those financial lifelines.

Britain’s first lockdown began in March and authorities allowed borrowers to suspend payments on mortgages and loans from April 9, without their credit rating being affected, to help ease the distress caused by tumbling wages and job cuts.

Policymakers have put a six-month cap on the credit amnesty, just as a second lockdown in England poses many of the same problems for businesses and households.

The number of people in severe problem debt has risen to 1.2 million due to the pandemic, with a further three million at risk, charity StepChange warned last week.

A bold longer-term strategy is needed from the Government to help households exit coronavirus-related debts safely, StepChange said.

Research from the charity, based on a survey of more than 3,200 people in September, indicates that levels of household borrowing and arrears attributable to coronavirus have surged to £10.3bn since the start of the pandemic – a £4.3bn increase since May.

The charity also believes that 2.87 million people across the UK who have been impacted by coronavirus are now at high risk of long-term debt problems.

The Tackling the Coronavirus Personal Debt Crisis report found nearly three in 10 (29 per cent) adults have experienced a negative change of circumstance due to Covid-19, such as unemployment or redundancy, or furlough with a salary reduction.

People who were financially vulnerable before the crisis are particularly likely to have been affected by coronavirus.

Twice as many people with an income between £10,000 and £20,000 have fallen behind or borrowed to make ends meet as those with an income between £50,000 and £60,000, the charity said.

StepChange said that since March, 25 to 34-year-olds have been most at risk of falling behind on essential bills and borrowing to make ends meet.

Families with dependent children, particularly single parents, have been squeezed by falls in income and additional childcare costs.

StepChange said support measures need to go beyond the immediate crisis.

A raft of financial support measures has been introduced by the Government and regulators, including the extended furlough scheme and payment deferrals on loans, but there are concerns that some people may be simply pushing debt problems further into the future.

The Stepchange report paints a picture of a nation sleepwalking into a debt crisis, according to Phil Andrew, the charity’s CEO.

He added: “Despite a bold initial reaction to the pandemic, the Government and financial services sector’s toolkit of responses has not evolved, and the result is a spiralling number of people being plunged into debt due to Covid-19.

"And the worst is yet to come. This winter, a second national lockdown will drive unemployment, reduced hours and rising energy bills, all of which is hampering economic recovery.

“Without a bold, long-term vision for those financially affected by the pandemic there is a real danger of lasting economic and social damage.”