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Despite the government’s claim that it is reducing poverty, thousands of UK citizens have to borrow to obtain domestic goods, clothes and even food. Borrow from whom? The high street banks don’t want them. In general, the poor have two options: government Social Fund loans or commercial loan sharks.

Until the 1980s, people dependent on welfare benefits were entitled to grants, often called single payments, to replace worn-out fires, fridges, cookers and other essential items. Then the Conservative government replaced most entitlements by Social Fund loans, which were interest free but discretionary and limited by the tight budgets of social security district offices. The loans were - and are - repaid by compulsory deductions from benefits. Families could have £5-£30 a week taken from what, even the government acknowledged, was just enough to survive on.

The results were devastating. Research shows that most families repaying Social Fund loans have found it difficult to meet the costs of clothing, shoes and food. In some cases they ran out of money altogether. I know a mother who just about gets through the week but is at a loss if a household repair needs doing or if the children want money for a school trip. Holidays are out of the question.

The unwelcome reappearance of pawnbrokers is a stark indication that money can be made out of the poor. And there are shops that also prey on them. They display notices with the words: "Unemployed welcome, no credit checks, immediate delivery." The catch is the interest rates. One domestic item was in a window at £739 but, with interest, the real cost was £1,636. Meanwhile national companies send out smooth-talking door-to-door salespeople who offer immediate loans or cheques. The interest rates can be 200 per cent or more.

A dignified woman asked me to apply to a charity so that she could buy Christmas presents for her child. Her furniture, cooker, TV and clothes were obtained by expensive loans. She was cutting down on her own food but still could not save for Christmas.

The Social Fund and private enterprise loans are separate but linked. Claimants paying back large sums of money to the Social Fund may be so short of cash they then also turn to the commercial loan sharks.

I have been involved with a small hardship fund. In one year 54 per cent of the recipients of help were in hock both to the government and the private loan companies. On the other hand, some families are repaying so much to catalogues, shops and door-to-door sharks that officials refuse their applications for Social Fund loans on the grounds that they cannot afford to make repayments. In short, they are too poor to be helped by the system that was set up to help the poor. Both the government and commercial systems need reforming.

What should be done? Robin Cook had it right when, as Labour’s shadow spokesperson on social security, he said: "I would like to see the Social Fund go…if a family needs a new cooker…it needs a single payment."

Yet, on taking office, Labour did a U-turn and refused to abolish the loans. The present Conservative spokesperson, David Willetts, likewise is opposed to reform. So much for compassionate Conservatism. Professor Gary Craig estimates that the reintroduction of entitlements would cost £800m, which is just chicken-feed. Yet all the political heavyweights support the government burden on the poor.

What of the company loan sharks? The Debt on Our Doorstep campaign, for which churches must take much credit, proposed that a cap be placed on the interest rates which can be charged for consumer goods. The government disagreed on the grounds that this would interfere with the workings of the free market. Strange. I remember when the free market was rightly called capitalism and I supported the Labour Party because it existed to protect poor people from the fat cats.

I hope all welfare workers will lobby their MPs to urge reforms to the Social Fund and for restraints on loan sharks. But that is not enough.

The real goal is to abolish the poverty which forces thousands of citizens to borrow in order to survive. The government should establish an independent inquiry - which includes people on low incomes - to determine just how much money is required for a decent lifestyle. It should then ensure that all families receive at least that sum.

Bob Holman is associated with a locally run project in Easterhouse, Glasgow.