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Poverty and debt go hand-in-hand

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by Will Paxton, research fellow, assets
Tribune - 30 July 2004

The government’s efforts to reduce poverty will fail unless it also tackles unsustainable debt. Tax credits and the minimum wage can pump as much money as you like into families’ pockets – but if they just have to spend more of it paying off exploitative lenders, then the impact on poverty and social justice can be minimal.

Led by Gordon Brown’s Treasury, the government has started to wake up to this fact. For some time there has been a strong, if not vocal, commitment to reduce the number of children living in poverty. Taking 1999 as the starting point, targets have been set to reduce child poverty by a quarter by 2004/05 (for which we are on course according to economists) and then by a half by 2010/11 (an altogether different prospect but achievable).

Until recently, though, ‘poverty’ has been defined purely in terms of income – or 60 per cent of median income to be precise. But this has changed. The Department for Work and Pensions has decided that simply measuring income does not capture the true essence of poverty: in the future the impact of government policy on various indicators of deprivation will be assessed as well. What these will be is as yet undecided, but examples could include whether people can afford a substantial meal a day, or whether they have two pairs of decent shoes.

This could have far-reaching implications for policy. Yes, get money into people’s pockets; but yes also to ensuring that once there, this money can be used to make a genuine difference to standards of living. A government committed to tackling poverty needs to worry when seven per cent of households can be described as “over-indebted”; when one in five say that they are experiencing financial difficulties; and when it is the poor who are vastly more likely to experience these problems. In short, the problems of debt mean it is expensive being poor, and a government committed to social justice and tackling poverty can’t afford to let this continue.

This is one reason why last week, in an impressive display of joined-up government, ministers from three departments assembled at an ippr conference to launch a ‘Debt Action Plan’. So what action we can expect? Well, much that is good, but there are limitations.

The ‘good’ includes renewed efforts to promote financial literacy, measures to tackle illegal money lending, and funding of more free debt advice. But will this be enough? In two important respects more progress is needed.

First, the government must reform the Social Fund. This is the part of the benefits system designed to provide the poor with affordable credit, through a mix of grants (for specific times such as having babies) and loans (largely available in case of a costly disaster, like a fridge breaking). Some reform was announced last week, but it amounted to no more than a tinkering at the edges. Root and branch change is needed: affordable loans need to be made available to more people, not just the very poor; loans should come with fewer strings attached; and rather than requiring people to come to benefits offices to take out loans (as is presently the case) they could be available through a range of different outlets.

Second, progress must be made on the flip-side of debt: savings, or assets. Perhaps the most fundamental way of preventing problem debt is to enable more people to save for a rainy day. Next year pilots of the Saving Gateway, a matched savings policy for the poor, will finish. Early signs are that offering a pound-for-pound match as an incentive does make it possible for even those on very low incomes to save. By next year we will know more about how much it also allows them to avoid debt.

If child poverty is to be halved by 2010/11, then as well as increasing incomes, government must tackle problem debt. The early signs are good, but will they make some of the more fundamental changes necessary?