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Tearing Apart Britain’s Safety Net

In the last decade the government has cut a £34 billion hole in Britain's safety net, leaving the unemployed and vulnerable with minimal supports. Coronavirus shows why that was such a huge mistake.

Apparently, we are at war. In France, Emmanual Macron has declared this unequivocally. In the UK Boris Johnson has announced a ‘wartime government’ and in the US, Donald Trump is now a self-proclaimed ‘wartime president.’ Even Angela Merkel has argued that German solidarity faces its greatest challenges ‘since World War II.’ 

The metaphor fails on a number of counts. But it truly breaks down when it comes to preparedness. Wars are human-made tragedies – and sadly we are perpetually planning for them. The UK was only able to successfully defend itself in the Battle of Britain because it started producing spitfires from 1935. Fast forward to the 2010s, and defence was among one of the very few areas shielded from austerity, with spending protected at around 2% of gross national income for much of the past ten years.  

The health impacts of pandemic are disease-specific and difficult to plan for, but this is less true of the economic impacts. Whatever the cause, we know that on average the UK faces a recession once every 10 years. And yet by the start of 2020, 12 years on from the last recession, we could hardly have been less well equipped for a major downturn. 

By the outbreak of pandemic, our usual recession fighting toolkit was all but exhausted. The Bank of England’s base rate of interest (used to fight recessions by lowering the cost of servicing debts like mortgages and credit cards) was close to its ‘effective lower bound’ – a point beyond which further reductions have little or no positive effect on spending in the economy. So too was the scope for further ‘quantitative easing’ (where central banks buy up financial assets to lower interest rates on long term debt). 

Last year it was estimated that the combined, remaining firepower in the UK from both rate cuts and quantitative easing might be enough to stimulate the economy by around 1-2% of GDP. But even before the outbreak of coronavirus, history had told us this wouldn’t be enough. Without any offsetting measures, recent recessions have typically threatened a 5% to 15% contraction in GDP – and forecasters are already predicting the coming shock to be at the top of that range. 

Other monetary policy schemes have been cooked up, such as the latest iteration of the ‘term funding scheme’ – a way of providing cheap loans to banks on the condition that they pass on the lower costs of finance to the rest of the economy – announced by the Bank of England earlier this month. But more than anything, such schemes reveal the ultimate limitations of relying too heavily on monetary policy to manage recession: making borrowing cheaper and easier only works if someone else is willing to spend and borrow. 

When the underlying problem comes from confidence in the banking system, such as in 2008, such measures can be effective. But when the issue is that millions of people are unable to work and spend because most economic activity has necessarily been put into suspended animation, trying to move the economy by making credit cheaper is a bit like pushing on a piece of string. 

In such circumstances, direct government subsidy through fiscal policy – tax and spending – is the only remaining option. But the challenge here is speed and design. As the government has found to its cost, brand new grant and wage subsidy schemes – although welcome – take time to implement, and will invariably contain large gaps, such as for the self-employed or those who lose jobs or hours before the scheme is up and running. 

By far the most effective fiscal lever in recession is the existing social security system because it can maintain incomes, and therefore spending, even when people lose their jobs and without any need for further action from government. Usually this so-called ‘automatic stabiliser’ is just the first line of defence against downturn. But with monetary policy so constrained, we have known for years now that our social security system will be among the last lines of defence as well.

Despite this, the UK has walked into this recession with one of the weakest employment safety nets among advanced economies. Total out-of-work payments received by UK employees are on average around 34% of their previous in-work income – the third lowest among 35 OECD advanced economies. And at 15% of average earnings, the main adult unemployment payment is worth less than at any time since the 1948 creation of the welfare state. 

Most tragically of all, this didn’t happen by accident. After a decade of cuts, and once universal credit is fully rolled out, the UK’s welfare system for working age families will be a massive £34 billion per year weaker than would have been the case if the 2010 system had been left unreformed. In this context, the £7-£8bn of strengthening for universal credit and sick pay announced over the past few weeks looks woefully inadequate.

Wars cost lives, and so do pandemics. But failing to plan for recessions also risks the living standards of millions, and not just for those worst affected in the short term: to the extent that recoveries are slow or incomplete, everyone’s lively hoods are at stake. In the peace that follows war, it is vital that societies learn the lessons from its past mistakes. In preparing for the next crisis, never again can we let our safety net wear so thin.