Round table: reducing debt

Debt, both public and private, has cast a long shadow over the post-credit crunch era. While governments have struggled with mountains of sovereign debt, growing mortgage balances mean that individual citizens are plunging ever further into the red. Money education charity Credit Action claims that UK personal debt stood at £1.4tn at the end of August 2012.

Most of this debt is owed to mortgage lenders, banks and credit card companies, but the government is also owed a substantial sum. Earlier this year an interim report by the Cabinet Office’s Fraud, Error and Debt (FED) taskforce put the total in March 2011 at £25.3bn. More than 13,000 civil servants work in debt management and collection, yet £6.5bn is written off each year – equivalent to more than five per cent of the public finances deficit.

On 26 September a CSW round table, held with the support of IT services company HP, discussed how to reduce the debt owed to government bodies and improve collection rates. Sarah Storey, who leads the Cabinet Office taskforce’s debt reduction programme, began with an update on the progress so far. She claimed that the sum owed has fallen to around £22bn in the last financial year.

Debts to government
“The majority of that debt sits within HMRC, which is dealing with tax debt and tax credit debt,” Storey explained. Other significant creditors within government include the Department for Work and Pensions (DWP), which collects money overpaid to benefit claimants; Her Majesty’s Courts and Tribunals Service (HMCTS), which seeks to recover unpaid fines; and the Legal Services Commission (LSC), which advances money to pay for legal representation. Many other departments are owed smaller amounts. “That doesn’t include debt between departments and debt owed by foreign governments; it is debt owed by individuals and businesses,” Storey added.

The LSC’s Richard Houlbrook said debts owed to government are different from those owed to private companies. “A lot of government debt arises from circumstances rather than choice. As a lending banker, I can get you to give me all the information I need to make an informed decision about whether to lend you the money. I can manage that risk. But in government we don’t choose to have people as our debtors,” he pointed out. Since the government can’t pick who it lends to, it’s inevitable that its debtors will be a higher-risk group.

Fairness
They are also a more vulnerable group than the vast majority of people owing money to private businesses, and government must ensure its response is proportionate. “Fairness is a big theme around debt because there are people in genuine hardship who can’t pay back their debts, or who are debtors due to circumstances beyond their control,” said Storey. “Then there are a set of people who are deliberately avoiding paying back what they owe. For fraud you can have very clear messages around zero tolerance. That would be completely the wrong approach on debt. Debt is a natural part of the system that government oversees.”

Private debt collectors concentrate on the debts that will be easiest to collect, to produce the greatest return on the money invested in collection; but the need to maintain fairness renders that approach unsuitable when it comes to the collection of government debt. Fairness demands that those deliberately evading debts be pursued, and that the position of those in dire financial difficulties not be made worse.
 
In some cases it is hard to write off debts to government because doing so would be unjust: for example, the public expects criminals to pay their fines, no matter how long it takes them. But this creates further problems, explained Houlbrook. “You’re not doing your housekeeping, so inevitably your debt stock blooms and you reach the point where you can’t see the wood for the trees,” he said. “You can be pursuing a relatively small amount and be blind to something much bigger.”

Quality of information
Another barrier to debt collection is poor quality of information. In the courts, fines are often imposed on people with little ability or willingness to pay, and many of whom may already owe large sums in fines to government. As John Wheatle from HMCTS pointed out, much less financial information is required to get a conviction than to collect any resulting fine. “We’re growing a significant amount of debt, and lack the information to enforce it effectively,” he said.

If judges are given better information on defendants’ circumstances before the sentence is imposed, he suggested, they might choose a different sanction, rather than imposing a fine that’s unlikely to be paid. HMCTS can access DWP information on offenders who are claiming benefits, but that data is currently only available after the fine has been imposed. It is already an offence for defendants to give inaccurate information on their finances, said Wheatle’s colleague, Michael Foley, but people are never prosecuted for it. The law is a “toothless tiger,” said Foley.

Samantha Tennakoon from HMRC added that sometimes resources are wasted pursuing people for illusory debts. She cited the example of someone who ends a period of self-employment without informing HMRC; in such cases, HMRC continues to erroneously build up a debt against that person’s name of £2.65 every week, wasting time and money pursuing a debt that exists only in an accounting error.

Improved data analysis systems would help, said Houlbrook, but because of departments’ reluctance to divert money from frontline services, the necessary investment capital is rarely available.

Sharing information
The group agreed that much information that could be valuable in preventing the accrual of debt and in pursuing debtors exists within government, but it is difficult to access because of departments’ inability or unwillingness to co-operate. At HMCTS, for example, officials have to rely on a ‘means form’ filled in by offenders rather than using potentially more reliable data sourced from other departments – though Wheatle noted that work is underway to find out what other datasets the agency may be able to access. 

“We took a look at a means form, and it is a pretty blunt instrument,” said HP’s James Johns. “A lot of the information about identity, about address, about income, family status, and benefits already exists somewhere in government, and could be brought together.” The judge could be given such data before sentencing, helping them to decide the appropriate course of action. And while Johns accepted that data protection rules might make this difficult in the UK, he pointed to overseas examples – such as that of Flanders – where government has adopted a ‘tell us once’ approach, sharing information between departments.

His colleague, Nigel Bell, asked whether government might be “too soft” in not insisting that service users agree to have their information shared as part of the contract entered into with the service provider, a practice common in the private sector.

Cass Chideock from the Cabinet Office said that government departments have got better at sharing information, but urged careful consideration of how to proceed: “Where government is someone’s only supplier and they have little choice whether to take that supplier you need to be more cautious, but there are other times when perhaps we should take the attitude that we have to protect the taxpayer,” she said.

Cross-department working
Forums do exist so departments can work together on tackling their debt problems. Beneath the FED taskforce is a programme board looking at cross-government debt, and there’s also a working group of officials from departments that hold the biggest balances of debt.

Houlbrook said that with encouragement from the Cabinet Office, he’s worked together with colleagues at HMRC and the UK Border Agency. But Johns commented that given a choice, many civil servants might prefer to avoid debt recovery work in favour of “more positive” activities. “If, as participants have suggested, debt collection is a Cinderella service in some departments, is there an argument for consolidating collection into one place?” he asked. 

Neither Wheatle nor Houlbrook favoured that notion, arguing that the very diverse nature of the debts within government makes such amalgamation undesirable. “I think when you lump it together it becomes such a huge complex morass of things that you’d get nowhere,” said Houlbrook.

The panel discussed whether adequate specialist training exists for civil servants working in debt collection across government. Storey said her team is examining the options, and suggested the best solution may be for the centre to help departments package up existing training modules within the operational delivery profession to suit their individual circumstances.

Working with the private sector
Glen Portman from the Rural Payments Agency asked how much appetite there is within government for using external debt recovery agencies, or for packaging up debt and selling it to a company to collect.

Storey responded that there is currently hardly any selling of debt by government, but many departments use external collection agencies on a commission basis. These are typically funded through departmental budgets rather than by sharing the money collected.

HMCTS is exploring the possibility of entering into a private sector partnership to manage its debt, revealed Wheatle, in the hope that its partner might be able to bring more advanced analytical tools to bear.

“We’re using a debt collection agency,” said HMRC’s Tennakoon. “It has increased the amount of debt we are collecting, but it’s also been [undertaking a] data cleansing exercise for us because we are establishing whether that debt is truly owed to us or just spurious. There has been quite a strong reaction from customers. They don’t want to communicate with the private supplier; they come back to us to resolve the issue.”

Several of the group raised the issue of whether private sector collectors can be relied on to collect debt fairly. “Private sector suppliers are not incapable of operating in a fair way,” Johns suggested with a smile, “but it is important in any kind of public private partnership that the requirements are specified.”

‘Nudge theory’
The panel discussed innovative approaches to debt recovery and prevention, including behavioural economics, or “nudge theory.” Houlbrook said: “We got some funding to pilot proactively chasing some debts. We wrote to 30,000 people and got in nearly £10m in about five months, by asking nicely and telling them that the money gets recycled to help other people who need legal aid. It’s a bit like peer pressure. From next April we will make that a ‘business as usual’ activity.”

Bell pointed out that prevention is always better than cure: departments should engage with people and encourage them to pay up at the correct time, rather than waiting until they default and then taking expensive measures to recover the debt. Personalising communications using first names, and preventing people from getting into debt by sending out reminders that payments are due, were both agreed to be effective tactics. Making it easier to pay was also a popular approach: HMCTS, for example, has links with a company that issues payment cards that can be used to pay fines as well as household bills. Storey recommended the use of automated payment telephone lines to help ensure that people’s embarrassment at getting into debt doesn’t make them unwilling to call up and pay what they owe.

Chideock added that government could reduce the level of debt by making fewer errors: “People sometimes go into debt because government puts them there by overpaying them. It’s much easier reducing errors in tax credits and benefits than it is to claw it back,” she said.

There is no easy solution to a complex problem such as debt owed to government, but there was a clear belief among the panel that progress is being made. Houlbrook claimed that a network of expertise and shared contacts is being created, helping to generate fresh ideas. “There doesn’t have to be a big investment in technology or change in legislation,” he said. “Sometimes we just have to challenge the status quo.”