Simon Read: Cutbacks are forcing more people into a debt spiral

There's damning evidence in a report published by left-wing pressure group Compass that struggling households are being forced into the arms of legal loan sharks as a direct result of the Government's widescale cutbacks. The research included in-depth interviews with 252 social housing tenants in the Midlands and ministers would do well to look closely at the findings.

Just for starters, 28 per cent of those interviewed for the report On The Margins: Debt, Financial Exclusion and Low Income Households said they found their debts increasingly unmanageable. There's probably no big surprise in that: we know that once you slip into debt, the spiral can quickly take control leaving little hope and plenty of worries for those families affected.

But I was surprised at the shocking scale of money owed compared to money coming in. The median income of those surveyed was just £7,582 per annum which is, incidentally, less than a third of the UK average income of just over £24,000. But the median debt totalled £1,200. That means the amount owed works out at around a quarter of income.

Now that may not seem so bad if you earn £100,000 and owe £24,000. It could be achievable, for instance, to clear the debt within two years by paying off £1,000 a month. That's assuming you're living within your means, of course. But if your income is just £7,500 a year, how much spare cash do you think you'd have to put towards clearing debts? In fact the social tenants in the Midlands said they spent 14p of every pound they earned repaying debts.

"What makes this particularly alarming is that the Government is banking on personal debt increasing as a way to reduce the deficit but 28 per cent of those we surveyed are finding debts increasingly unmanageable," said Joe Cox, one of the authors of the report. "The Government's economic plan could be driving borrowers into the arms of legal loan sharks which is a particularly unpleasant experience."

Around half of those surveyed said they felt harassed by high cost lenders, he added. Such fear and lack of control is clearly going to get much worse for such folk when the full effects of the Government cutbacks are felt. There's clear potential for many people to end up in financial dire straits with no real hope of ever climbing out of debt, especially with a lack of affordable loans available to them.

Those in such positions are excluded from mainstream finance and have no choice but to turn to high-charging short-term lenders if they need emergency cash. Effectively that's a "poverty premium". families forced to turn to such lenders can be making a short step to financial misery and increased debt woes if they are unable to repay the cash quickly, as is the case with many.

Compass is one of the driving forces behind the End Legal Loan Sharking campaign, which I have written about in this column on previous occasions. They want regulators to be given powers to define and ban excessive interest rates in sectors such as home credit and pawnbroking.

Last month the Government said it will explore how a cap on the cost of credit could affect consumers. There are arguments for both sides, but while all the talking goes on, what will happen to those caught in the middle with growing unmanageable debts?

More bill blows to come as BT hikes prices

In a further blow for hard-pressed families, BT is raising prices by up to 5 per cent from December. The following month sees average rises of 8 per cent in the cost of rail tickets, while energy price hikes of up to 20 per cent will have already had a devastating effect on household finances.

Older or disabled people face a further financial squeeze from November when the Government scraps half-price coach concessions for them. For some, the abolition could increase their isolation.

"Many older people depend on the coach concession to get out and about, to see friends and family," points out Michelle Mitchell of Age UK. "A third of disabled people live in poverty in the UK and discounted travel has been a significant help to see family," says Neil Coyle of the Disability Alliance.

The Government should rethink this one. Targeting Britian's most vulnerable people will not just cause financial hardship, but could lead to social isolation and misery. And that's not really acceptable.

s.read@independent.co.uk