This blog originally appeared on the Left Foot Forward website in June

The chancellor George Osborne has personally cost the average household the equivalent of £4,000. This, according to Oxford economist Simon Wren-Lewis, is down to the delayed recovery, and his decision to pursue austerity rather than take advantage of lower borrowing costs to move towards investment and growth.

Even the recovery itself is set to put more people in debt. Two things the government is doing have an almost cast-iron guarantee of pushing households into precarious financial situations: keeping wages low and eroding the safety net. This is a reality today in Britain.

Last week it became clear that UK households’ average weekly income has hit an 11-year low, according tofigures from the Department for Work and Pensions (DWP).

Real household incomes (acknowledging inflation) remained unchanged at £453 per week in 2013/2014 compared to the year before, the lowest for a decade.

Additionally, George Osborne will announce in his budget next month that £12bn worth of cuts will be made to welfare spending. So divisive are these plans that even the Adam Smith Institute and the Institute for Economic Affairs opposed them.

Moreover, tomorrow will see the Tories axe the Independent Living Fund which has come to be a lifeline for thousands of disabled people up and down the country. The fund will now be distributed by local councils,two-thirds of which will not be able to ring-fence the money for it.

So, now more than ever, we need financial institutions that are fit for purpose in the challenges that will face struggling Britons in the coming months and years.

However as my colleagues – Dr Daniel Tischer and Dr Johnna Montgomerie – and I say in a report published recently for the Political Economy Research Centre (PERC), funded by the Economic and Social Research Council (ESRC), we are still quite a way from having a form of community finance that can step up to these challenges.

This is a real test for those of us who had hoped credit unions, as a form of community-led democratic finance, could have posed a significant challenge to payday lending on the high street.

What we found, for example, is that:

  •  Recent growth in the credit union sector has intensified a split between these institutions, between those that are larger and more solvent and smaller/vulnerable firms, which has put a financial strain on the sector
  • Media (and government) attention and scrutiny exacerbates this split by positioning credit unions as an alternative to the payday lending sector; and
  • Legislative and regulatory developments have supported changes to the sector thus far, but questions over the ability of credit unions to enter the payday lending business – in an ethical way – remain.

That is not to say all credit unions are failing.

In Durham recently we held an event jointly with Fincan, the Centre for Social Justice and Community Action at Durham University, and Thrive – all of which are organisations working in various ways to build a sustainable community finance model.

We heard some fantastic ideas for how to make credit unions more important in the UK, including creating a British Universities Credit Union and getting the church more involved.

I also recently spoke to Geoff Leech, who is working on Engage – a payment product credit unions sign up to and their customers can use to make purchases in shops and receive cash back.

Already this is making smaller financial firms more attractive to people who like the perks of mainstream finance. Leech told me he had been working with 50 credit unions in 2012; now he is working with 110. A good month will see three or four more partner with him.

Conditions in the UK are getting worse. We may be recovering but it is uneven. Not having learned the lessons of what austerity can cost us, this government is embarking on more of the same, and personal debt and over-indebtedness is inevitable.

That is why we need a better system of finance for households. As it stands, credit unions are struggling to make this happen.

What we recommend in our report is that they make more efforts to partner with each other, to have bigger firms better able to increase membership numbers. We also recommend that mainstream financial providers fund more initiatives for credit unions to make smaller loans, undercutting payday lenders.

The cost to society for problem debt is £8.3bn. The government is currently creating the conditions to make this problem even worse, which is why the time for community finance is now.

Carl Packman, 29/06/15