Its affluent image hides hardship caused by low pay, high rents and 'ruinous' credit that a local campaign is trying to stamp out

On the face of it there would seem to be no obvious reason why the elegant and unostentatiously prosperous city of York – currently striving to become Britain's first "poverty free" community – should worry about poverty at all.

There are, after all, many places where you would consider poverty to be a more urgent and extreme problem, where hardship and destitution is more vividly displayed.

This clean, pretty, well-to-do city throngs with tourists and shoppers; yellow bicycles, marking the successful recent arrival of the Tour de France, dot the streets; the economy is booming; unemployment is practically non-existent.

If York is a poster city for the upside of Britain's tentative economic recovery, however, it is also acts as a cautionary tale about its downside: a widening inequality that some fear is slowly changing the fabric and character of a place famed for its historical association with fairness and social justice.

"You can get off at York train station and walk for hours and not see poverty at all," says Steve Hughes, editor of the York Press, the local newspaper that has been running an extraordinary "Stamp Out Poverty" campaign over the past year, highlighting York's hidden poverty. "We wanted to get under the veneer. We always felt that York was a tale of two cities; that tale gets lost in the overall message that everything in the garden is rosy."

The idea of "hidden" poverty crops up again and again: so what is it? "It's not the sort of poverty you can see as you bomb about in your Audi," one charity worker tells me ruefully.

Another describes it as "behind-closed-curtains" poverty. There is some street poverty, such as begging and rough sleeping, as there is everywhere; but in York you have to seek it out, and it is not in the most obvious places.

What local campaigners mean is that their prosperous city hides an uncomfortable secret: rising numbers of local people hold down jobs but increasingly don't earn enough to get by. Many locals can no longer afford to live in what has become the most expensive city in the north of England as rents, house prices, and basic living costs such as childcare spiral, leaving those on low and middle incomes struggling.

Spurred on by Stamp Out Poverty, the council, local businesses, charities and faith groups set up their own poverty-free campaign a year ago this week. It set out to challenge the idea that poverty should exist amid such affluence, but it feels like it has become something bigger: a struggle for the soul of a city.

"We could become a kind of affluent outer-London borough where nice, well-off middle-class people live. But we want diversity: we want people to be able to live here but not at the expense of living in poverty," says Kersten England, City of York council's chief executive. "We have to ask: 'what kind of community do we want to be?'".

The York Press found that for a wealthy city, far too many citizens were caught in a poverty trap, paying unsustainably high rents; apparently comfortable, stable families living precariously – "two pay cheques [away] from the street", and ruinously dependent on high-interest credit.

Such dilemmas are not restricted to York, says Julia Unwin, the chief executive of the Joseph Rowntree Foundation (JRF), a poverty charity established from the legacy of the local 19th century chocolatier and philanthropist of the same name. York embodies a specifically middle-England kind of poverty, she says: "If it happens in York, it can happen anywhere.'"

If work was guaranteed to drag you out of poverty, York should not have a poverty problem. Just 1.3% of the working age population is jobless (down to below pre-2008 levels, and exactly half the national average); the numbers of people claiming jobseeker's allowance have decreased by 35% in the past year. There are very low levels of benefit dependency, and there have been recent falls in youth unemployment.

The problem is that too much of the work available isn't keeping pace with living costs. The proportion of people in part-time work – many of them women – has risen by 11% since 2012.

This reflects, in part, York's tourism and hospitality industries, which rely on low-wage, part-time and zero-hours labour. Part-timers, notes the council, are twice as likely be on low pay. And sure enough, a third of York's workers are not full time – compared to 25% for the UK as a whole. Despite increasing momentum around the Living Wage campaign – and several big local employers, including the city council, JRF, Aviva and Nestlé have signed up to pay all employees £7.65 an hour – a fifth are paid below that level.

The council's strategy is threefold: to promote not just living wage jobs but "good" jobs that offer a measure of stability and security; to mitigate cost-of-living pressures on the low paid by brokering discount deals on white goods and energy; and to promote credit unions as a way of ensuring a "[loan] shark-free city".

There's a been a campaign to encourage greater takeup of free school meals. But the £600,000 funding to implement the strategy feels relatively meagre; as the council itself noted last year, the number falling into poverty "is increasing at a rate beyond the ability of the council, in isolation, to manage".

Rebecca Jeffrey, social policy co-ordinator at York Citizen's Advice Bureau (CAB), points out that for those on the lowest incomes, welfare reform such as the bedroom tax has been actively impoverishing. York CAB has seen a 50% increase in clients seeking advice in the past 12 months, many having fallen into debt attempting to pay for basic living costs.

"The council is trying really hard and doing really good stuff," she says. "But at every stage it gets hindered by national policy changes. There's only so much the council can do."

In the Carecent charity in central York, a steady stream of homeless residents files into its canteen from 8.30 in the morning for a free, eat-as-much–as- you-like breakfast. The kitchen is much busier than it was two years ago, says project leader Nicky Gladstone, who blames the stronger demand on increasingly tight welfare conditions and benefit sanctions.

Gladstone is optimistic the city-wide poverty campaign is beginning to change the perception that poverty is self-inflicted. The food bank phenomenon, she says, "has started to lap a little at the shores of people's understanding of poverty".

York Press says measuring the impact of the poverty initiative is tricky, though it will continue to pursue its campaign, "to keep the issue of poverty out in the open".

The council admits it will take more than two years to achieve its vision. It plans a bold structural intervention to tackle York's hidden poverty, proposing to build 22,000 homes by 2030, including two sizeable new towns. Its house-building ambitions are not overwhelmingly popular with the nimby brigade in the city.

For Kersten England, seeking to end poverty in the city of Joseph Rowntree is both historically apposite and precisely what a modern, progressive "place-shaping" council should be seeking to achieve.

As she says: "There's no excuse for people to struggle to make ends meet in a place like this."

Laura Hagues, food bank manager, York: A tale of a city of two halves

Groceries at a food bank. Photo: Christopher Thomond for the Guardian

'York food bank has been open for two years and we now have four distribution centres in the most deprived areas of York. We are open every other day, and over the last year we've been averaging about 130 food vouchers a month. We hit a peak in the school summer holidays with families reliant on free school meals.

Over the last year, more than half of those coming to us have benefits issues such as sanctions or delays as they transfer from one benefit to another. We do see a lot of people who have been hit with fairly harsh sanctions.

The next biggest issue is people in work who are on low incomes. York CAB has carried out research showing that people on zero-hours contracts are being forced to take out payday loans. There begins a spiral of debt and people can't get out of it. These are people struggling to get by day-to-day anyway, and then something will happen – for instance being hit by the bedroom tax, and as they don't have a safety net they have to use the food bank temporarily.

I'd like to think that we won't need food banks at all in a few years but maybe I'm being optimistic. We need a few things to make that happen. The council has committed to a Living Wage and local businesses are slowly coming around to the idea. People need to have a good, regular income. A review of benefit sanctions also needs to happen.

York is a city of two halves. There's a lot of wealth, but then there's the other end of the scale. People who come in will open up and have a chat about how lonely and isolated they are. When they are in that situation they don't feel like they're part of a community – the poverty is hidden behind closed doors.

People in York have been very supportive, providing food for the food bank. We had a big Tesco donation last weekend and we took in two tonnes of food. That's the thing about being a city of two halves, there are plenty of people in a position to be able to help.'

As told to Dominic Smith