Cost of living - effects on debt: review of emerging evidence

1. Executive Summary

1.1 Changes as a result of the cost of living crisis

It is too soon to fully understand the impact of the cost of living crisis on levels and types of debt in Scotland. It is difficult to unpick the role of the cost of living crisis in recent increases in household debt from other longer term contributing factors.

However, steep rises in the cost of living (not matched by rising incomes) have increased the scale of the debt problem by further eroding living standards, reducing financial resilience and negatively affecting household debt affordability. Some households have been disproportionately affected by these developments.

An increasing proportion of households are struggling to pay bills and pay off debts as a result of cost of living increases. A number of reports published since 2022 show increases in the average amount of unsecured debts and arrears owed. However, statutory debt solutions in Scotland have not increased since 2020.

1.2 Debt types

Numerous sources show that energy debt has increased during the cost of living crisis, as has council tax debt, types of consumer credit and borrowing from friends and family. Direct deductions from DWP benefits increased from the start of the pandemic. Despite energy prices falling from their peak in 2022, they remain higher than before the crisis and those with legacy energy debts are struggling to pay debts off.

A significant proportion of low income households have been increasingly unable to access regulated and mainstream consumer credit, with some low income household types much more likely to be declined than others. This leaves many households using more expensive credit and loans to pay for essentials, incurring a ‘poverty premium’ because they are not able to access mainstream credit.

A range of evidence shows that many of these households are (i) becoming increasingly indebted to public bodies (ii) falling behind with priority bills (iii) experiencing hardship and (iv) turning to illegal lenders. This is a cause for concern given the strong association between public and priority debt and poor mental health, particularly council tax debt. This has been attributed to the weaker protections for the person in debt, punitive debt recovery practices, and high stakes consequences of non-payment. These debt types are not regulated to the same standards as consumer credit.

1.3 Characteristics of households and people in debt

Being in full-time employment does not protect households from financial difficulties and problem debt. Low income working-age single person households are another group particularly affected by the cost of living crisis and struggling with problem debt. Recent evidence also suggests that problem debt amongst women may have worsened as a result of the cost of living crisis.

1.4 Debt services

Demand for debt advice has increased since the start of the cost of living crisis, with debt services reporting a higher proportion of clients with both deficit budgets and complex and multiple debt types, with little chance of repaying their debts.