The chief executive of the debt charity Mike O’Connor sounded the warning during his speech, ‘Sub-prime lending and debt rehabilitation,’ at the Council of Mortgage Lenders’ annual conference in London.
The Chancellor proposes to make a cut of £4.4bn to tax credits, which includes Working Tax Credits (WTC) and Child Tax Credits (CTC). His strategy to achieve this saving is to lower the income thresholds which will make less families eligible. For WTCs, Osborne proposes to drop the threshold from £6,420 to £3,850 a year meaning households earning over that amount will no longer receive the credits. For CTCs this will be lowered from £16,105 to £12,125.
Some 60% of StepChange’s clients have someone in their household who works; 45% of these working households receive some form of benefit or tax credits. O’Connor said CTCs were the most common.
The debt charity’s initial analysis pointed to a severe impact on its clients if tax credits were reduced, more so than a small increase in the Bank of England Base Rate.
He said about one in four of its clients would be affected by the proposed changes which would result, on average, in a drop in monthly income of £130.00.
Of the consumers registered with StepChange in receipt of tax credits who would be affected by Osborne’s proposed changes, 78% of these would be plunged into a household budget deficit.
“Cuts to welfare support could significantly redraw the debt landscape,” said O’Connor.
The CML’s members were warned that there would always be tension between consumers’ vulnerability to debt and their demand for credit that regulation would struggle to resolve. He said that responsible lenders must not cross boundaries which meant they were adding to the detriment of the borrower’s financial circumstances.
O’Connor said this was particularly relevant to mortgages which were often tied up with government policy to encourage homeownership. O’Connor raised the example of sub-prime Right to Buy mortgages offered before the onslaught of the financial crisis to social housing tenants who couldn’t afford to make the payments.
O’Connor said he was not suggesting that vulnerable borrowers should be barred from either credit or homeownership, but access without sustainability would do them more harm than good and different options needed to be explored by the industry.
Osborne’s proposals have been delayed by the House of Lords to allow Baroness Meacher, a cross-bench peer, to carry out independent analysis into the cuts. The Chancellor plans to announce the modifications in the Autumn Statement on 25 November.