Extending the UK furlough alone isn’t enough to save UK plc in 2021
The third wave is coming. Since the arrival of the coronavirus vaccine, there had been hope that winter would quickly pass and give way to a brighter 2021.
After a dark year, the big breakthrough in medical science represented a shot in the arm for both a tired nation and a government running out of road. Now there was a chance everything would be fine by spring.
Don’t bank on there being roaring 2020s to save the UK economy
However, faced with rapid growth in infections, restrictions on business and social life look set to last well into the new year. Government officials will be preparing for tougher controls in January, and the prospect that relaxing the rules at Christmas will lead to a sharp rise in infections. In any case, most people will not get a jab for several months yet, meaning tighter curbs are here to stay.
Following a burst of vaccine-induced euphoria, the outlook sadly remains a little bleak. And with it, the spotlight will shift once again to the government’s handling of lockdown and the economic support for households and businesses feeling the pinch. Only this time with the added chaos of Brexit.
What is universal credit and what are the problems?
Universal credit (UC) is the supposed flagship reform of the benefits system, rolling together six benefits into one, online-only system. The theoretical aim, for which there was general support across the political spectrum, was to simplify the system and increase the incentives for people to move off benefits into work. With a huge influx due to the economic impact of the coronavirus, in September 2020 there were 5.6 million people claiming UC.
The project was legislated for in 2011 under the auspices of its most vocal champion, Conservative MP Iain Duncan Smith. The plan was to roll it out by 2017. However, a series of management failures, expensive IT blunders and design faults mean it is now seven years behind schedule, and full rollout will not be complete until 2024. The government admitted that the delay was caused in part by claimants being too scared to sign up to the new benefit.
The original design set out a minimum 42-day wait for a first payment to claimants when they moved to UC (in practice this is often up to 60 days). After sustained pressure, the government announced in the autumn 2017 budget that the wait would be reduced to 35 days from February 2018. This will partially mitigate the impact on many claimants of having no income for six weeks. The wait has led to rent arrears and evictions, hunger (food banks in UC areas report notable increases in referrals), use of expensive credit and mental distress.
Ministers have expanded the availability of hardship loans (now repayable over a year) to help new claimants while they wait for payment. Housing benefit will now continue for an extra two weeks after the start of a UC claim. However, critics say the five-week wait is still too long and want it reduced to two or three weeks.
Plenty. Multibillion-pound cuts to work allowances imposed by the former chancellor George Osborne mean UC is far less generous than originally envisaged. According to the Resolution Foundation thinktank, about 2.5m low-income working households will be more than £1,000 a year worse off when they move to UC, reducing work incentives.
Landlords are worried that the level of rent arrears accrued by tenants on UC could lead to a rise in evictions. It’s also not very user-friendly: claimants complain the system is complex, unreliable and difficult to manage, particularly if you have no internet access.
And there is concern that UC cannot deliver key promises: a critical study found it does not deliver savings, cannot prove it gets more people into work, and has plunged vulnerable claimants into hardship.
It is not exactly the anniversary of his election landslide, a year ago this week, that Boris Johnson would have wanted. Brexit is not done, the oven-ready deal remains cold and unpalatable, and though an end might be in sight, the coronavirus crisis is getting worse. Merry Christmas!
During this renewed bout of economic disruption, the government will rely heavily on the furlough scheme it had been so desperate to get rid of. Lasting through until the end of March, it will be a valuable tonic at this difficult time.
But although the government should be praised for changing tack, there are several reasons why extending the furlough alone won’t be enough as the third Covid wave and Brexit chaos crashes over Britain.
First of all, many companies have already decided to cut jobs given the lasting damage inflicted during the first wave, and as they face up to the prospect of severe disruption over the coming months before the vaccine can be fully deployed. Since the good news on the jab last month, thousands of job cuts have nonetheless been made.
Official figures due to be published this week are expected to confirm that unemployment climbed above 5% in October – representing more than 1.5 million people – as UK redundancies shoot up at the fastest rate on record.
It would have been much worse without furlough. But as 3 million people – most of them self-employed – will tell you, it has not helped everyone. Now as the pandemic drags on, millions more are joining them, with unemployment set to hit 7.5% – or 2.6 million – by the middle of next year.
For those unable to benefit from the scheme, there is instead the benefits system. But after a decade of cuts, the safety net is threadbare and woefully inadequate to support unemployed workers through the third Covid wave and Brexit.
At a time when the jobs market is in the deep freeze, the safety net is still geared up for a jobs market running red hot with record employment and jobs vacancies. It is still set up for the priorities of the past decade of Tory government. Of austerity. Of ideologically driven policy to punish those considered too lazy to find work, and to demonise families on benefits.
According to the Joseph Rowntree Foundation, cuts in social security rates over the past decade, together with design flaws in universal credit and disability benefits, as well as harsh welfare reforms such as benefit caps, were already fuelling a sharp rise in extreme poverty even before the pandemic.
Even with a £20 per week uplift for universal credit in response to Covid this March, the Institute for Fiscal Studies estimates that an out-of-work family will get £1,600 less in benefits on average than in 2010, before the Tory austerity drive began.
Just before the crisis struck, total out-of-work payments for UK employees were on average about 34% of their in-work income – the third lowest in the OECD club of wealthy nations. According to the New Economics Foundation, the main adult unemployment payment in the UK is worth 15% of average earnings, less than at any time since the creation of the welfare state in 1948.
Meanwhile, in the run-up to Christmas, tens of thousands of families that started claiming for universal credit for the first time as the pandemic spread in March will be told their benefits will be capped, as the nine-month “grace period” for some new claimants expires.
As a consequence of all of this, destitution levels are expected to double in the wake of the pandemic, according to Joseph Rowntree. The charity estimates that 2 million families, including a million children, will struggle to afford to feed themselves, stay warm, or keep clean as the recession deepens.
Rather than acting to avert this crisis, Sunak is preparing to cut universal credit from April, threatening to push millions into poverty. Failure to change tack will mean a £1,000 reduction in income for over 6 million households, according to the Resolution Foundation, at a time when the economy will still be struggling to escape the Covid recession.
Pressure is mounting on the chancellor to draw up a fresh package of employment support to help the millions out of work. It is urgent for both reasons of fairness and prudent economic management, as the last thing a struggling economy needs is weak demand for goods and services as millions of unemployed workers tighten their belts.
Top of the list should be making permanent the £20 per week increase in universal credit beyond April, removing the cap on benefits, and expanding the benefits system to support more workers. The furlough scheme should be reformed to not just protect jobs, but to help create new roles and to support firms to train workers.
The welfare state urgently needs reform to bring it up to speed with the chaos of the early 2020s. Faced with the third Covid wave, Brexit turmoil, and worsening jobs crisis, it would be a powerful shot in the arm for the country.
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