Problem debt costs public finances £250m a year through extra strain on health and housing services, NAO says

Government accused of poor debt management policies, which may be worsening situation by causing additional anxiety or depression

The true cost to taxpayers is likely to be far higher because the NAO was unable to model other effects of problem debt, including on employment and benefits

Problem debt costs the public finances at least £248m and the government's own policies relating to debt may be putting additional strain on health and housing services, the National Audit Office has said.

Over-indebtedness directly affects an individual’s likelihood to experience anxiety or depression or to be in state‑subsidised housing, the public spending watchdog said.

The true cost to taxpayers is likely to be far higher than £248m because the NAO was unable to model other effects of problem debt, including on employment and benefits, due to gaps in the government’s data.

Overall, problem debt costs the UK economy at least £900m a year, the NAO said.

Debts owed to the government now account for 40 per cent of reported problem debt, up from 21 per cent in 2012-12. Despite this rapid rise, government departments and local councils lag behind private lenders in their debt collection practices, according to the report.

Funding cuts may also be putting pressure on councils to pursue debt too quickly and aggressively, which can worsen the situation of those with money problems, it said.

The report suggested that this approach may be counterproductive because intimidating actions can make debts harder to manage, increasing levels of anxiety or depression.

Conversely, one study showed that following best practice such as providing tailored debt advice, support and affordable repayments saved creditors an average of £750 per person.

The Cabinet Office leads work to improve debt management practices across government, but departments, agencies and local councils are responsible for their own approaches, the report continued.

Meanwhile, the Treasury does not fully understand the problem because it has limited information on money owed to utility providers, landlords, housing associations and government, such as through council tax arrears or benefit overpayments.

This hinders the government's ability to respond effectively, the NAO said.

It said problem debt, defined as the inability to pay debts or household bills, affects around 8.3 million people, with an estimated four in 10 people unable to manage their money well day to day.

Consequently, demand for debt advice is outstripping supply and, in order to close the gap, the government must increase funding for support by 50 per cent over the next two years, the NAO said.

StepChange Debt Charity chief executive Phil Andrew said the government was “simply robbing Peter to pay Paul”.

He added: “Poor debt collection practices that fixate only on getting as much money back as quickly as possible are counter-productive and ultimately harmful."

Gillian Guy, chief executive of Citizens Advice, described the NAO’s findings as "concerning".

“The NAO is also right to say the Government is lagging behind industry by persisting with poor collection practices,” she said.

Shadow chancellor John McDonnell said the report highlights “serious flaws” in how the government monitors information and handles problem debt.

He continued: “The recent collapse of Wonga has yet again shown the need for better regulation of consumer lending.”

Frank Field, chair of the work and pensions committee, said: “This report shows that in the last six years, the proportion of reported problem debt owed to government has doubled to 40 per cent , while the reported consumer credit part of the problem has closer to halved - a sorry indictment of the benefits policy and administration locking lower earning families in this country into a miserable cycle of debt and hunger, easy prey to loan sharks and forced to resort to food banks."