The UK is drowning in private debt. At least £6bn of household debt – and probably much more – has been racked up by 4.6m people during the pandemic. More than one in eight people on furlough have defaulted on a payment. The Institute for Fiscal Studies has warned of a wave of “zombie companies”, kept afloat by Covid-19 loans, going bust this autumn. There will be no “V-shaped recovery” – and recognising the scale of over-indebtedness is key to understanding why.

UK households and businesses were already over-indebted before the pandemic. Many were struggling to make ends meet. This made our economy extremely fragile – even more so than before the crash of 2008. And yet, back in April, the government chose to deal with the shutdown in large part by loading households and businesses with even more private debt. Businesses were encouraged to take out state-backed loans. Households got payment “holidays” on mortgages and credit cards. These measures did not lighten the increased financial burdens people were shouldering. They simply kicked the can down the road – with added interest.

The implicit assumption was that the disruption would be short-lived: once restrictions were lifted, the debts could be paid back. But this was always doubtful. Replacing income with debt is rarely a good idea, especially when that lost income is unlikely to be recouped. If anything, incomes and revenues coming out of lockdown will be lower than they were going into it – leaving those already close to the edge struggling to service their debts. For this reason, some argued that we needed a different approach – with grants for struggling businesses and relief from costs such as rent and utility bills. But these ideas were ignored.

Now, with large parts of the country back in lockdown and no return to normality in sight, the outlook is even more grim. Experts are warning that millions of households and businesses face a financial cliff-edge as emergency support schemes are withdrawn while economic chaos and uncertainty linger. For many, the result will be insolvency, homelessness or destitution.

More than a million small businesses have taken out “bounce back” loans without the usual credit checks. Much of this money will have been used to continue paying rent to commercial landlords for shuttered premises. It must now be dawning on many of these businesses that, for them, there will be no bouncing back. Many will go under – including some whose underlying business is perfectly sound, but who simply do not have the cash reserves to weather our prolonged state of quasi-lockdown. If this happens, the lender will get 100% of the value of the loan reimbursed by the state. The business and its workers will get nothing.

Meanwhile, many households face a perfect storm of cratering incomes and rising cost pressures, as payment holidays come to an end and the furlough scheme winds up. Many of the newly unemployed have piled up rent arrears and personal debts, which will become impossible to pay back. Some figures suggest that less than half of all rent owed was being paid during lockdown. When the ban on evictions is lifted, a wave of homelessness is likely to follow.

These debt burdens will not only ruin lives: they will also drag back the economic recovery itself. The UK risks getting trapped in a downward spiral. If indebted households have less to spend, and indebted businesses close or shed jobs, demand will be sucked out of the economy. This will prolong the recession, which in turn will tip more people into problem debt, which in turn will worsen the recession.

The UK has long fixated on public debt while ignoring our slow-burning crisis of private debt – and this crisis is no exception. When we talk about “how to pay for the crisis”, we are almost always talking about the rise in public borrowing. But this simply isn’t the issue. The costs of government borrowing are virtually zero, the risk of it being unable to service its debts non-existent. Meanwhile, insolvency is a looming reality for households and businesses up and down the country. They simply cannot bear the costs they are being loaded with. The real question is: how we can spread these costs more fairly.

The obvious next question is: why should the payment of creditors be sacrosanct? Why should landlords be the only people in the economy not expected to take a hit to their incomes, when millions of working people have had to weather substantial hits to theirs? Why should lenders be subsidised by the taxpayer to continue profiting from loans to struggling businesses, while the businesses themselves go to the wall?

Sooner or later, there will have to be a reckoning. As the recession drags on, more and more debts will simply become unpayable, whether the government and creditors like it or not. We can either wait for this to happen, and brace ourselves for the economic and social chaos it will bring with it; or we can act now to rebalance the burden.

Calls for wealth taxes and debt write-downs must be seen in this context. They are not about the well-off making sacrifices to help the less well-off. The point is that the least well-off are already making eye-watering sacrifices to maintain income flows to wealthy creditors. If this does not change soon, the UK’s recovery will be slow and painful. Tackling growing inequalities between those who own assets and those who owe debts is no longer simply a matter of justice: it is an urgent economic necessity.

• Christine Berry is a researcher, writer and consultant