Your support keeps us publishing. Follow this link to subscribe to our print magazine.

This Budget Won’t Fix Britain’s Broken Welfare System

Britain's welfare system is the last line of defence against the threat of coronavirus and a potential recession – but after a decade of shredding it, today's budget doesn't do nearly enough to restore the social safety net.

On the face of it the immediate threat of coronavirus seems to have done more for progressive welfare reform than half a decade of civil society opposition to Universal Credit. But in truth, all we have been given is a temporary sticking plaster to place over gaping, self-inflicted wounds.

The social security system is a vital economic stabiliser during economic downturns. Welfare payments help to soften recessions and accelerate recoveries by maintaining a minimum level of income and spending for families facing temporary job losses or a cut in pay.

In normal times, this would make social security an important first line of defence. But with monetary policy dangerously low on ammunition – today the Bank of England reduced interest rates to their effective floor – the UK’s welfare system is now among the last lines of defence as well. 

The timing couldn’t be worse. The increased reliance on social security to protect people from recession comes after decade of freezes and cuts that have left our safety net threadbare.

The chancellor, Rishi Sunak, appears to have recognised the need to act, with a series of temporary reforms to benefits related to sick pay and self-employment. In summary, those eligible for sick leave as a consequence of coronavirus will be able to claim it sooner, and those unable to claim sick leave will be able to claim more from universal credit. 

But in truth, it is far too little, far too late. Over the course of the last decade, annual spending on social security in the UK has been cut by £34 billion. In contrast, the sum total of today’s measures were apparently too small for the Treasury to even provide a costing. 

At the same time, the chancellor has chosen to spend a further £2.3 billion pounds a year on a cut to employee National Insurance contributions (NICs). But this move does little for those who most need support during a recession. The 4 million workers who earn below the NICs threshold get nothing, as do those without any work at all – just as the unemployment count is expected to rise.

Meanwhile, those on Universal Credit see 75% out of every £1 gained from the tax cut taken away in lost benefits. In total, the poorest 10% of households might stand to gain by around £40 per year on average, while the richest half of families will benefit by more than £200.

But failure to act properly won’t just limit the UK’s ability to ride out temporary, epidemic-induced recession. The UK’s challenges on poverty are reaching breaking point.

One in six workers (over 5 million people) are experiencing low pay alongside some form of insecurity at work. Over the past decade, average pay growth has risen more slowly than at any time in living memory. Meanwhile the proportion of children living in relative poverty after housing costs has also risen by 3% since 2010. This means 500,000 more children now living in poverty, despite the majority living in a family with at least one person in work. 

With a social security system that has been deliberately disrupted and starved of resources for a decade, as a country we have yet to even get the basics right. What was needed in this budget was an overhaul of Universal Credit. Cruel and inflexible design features – such as the system being digital by default, harsh sanctions and the five-week wait for payments – are all in need of reform. But more fundamentally, we need entitlement to welfare expanded, the level of conditionality reduced and the value of payments significantly increased.

To this end, a recent proposal from the New Economics Foundation (NEF) could represent a powerful first step. The idea is to swap the Personal Allowance of income tax with a Weekly National Allowance (WNA), paid in cash to nearly all adults and equal to the annual value of tax that would otherwise be paid on the first £12,500 of income. The WNA would also include a restoration of child benefit to its 2010-11 real-terms value. 

The poorest 10% of families, who currently benefit little from the personal allowance, would see their disposable incomes rise by around 30%. Meanwhile, the highest income taxpayers would contribute between 25 and 50% more, since the higher rate threshold of income tax moves pound-for-pound with a fall in the personal allowance. Everyone else would see either no change or would benefit from a rise in child benefit. In normal times, this reform would see 200,000 families lifted out of poverty, and the system as a whole would be far more resilient to recession.

Undoubtedly, this government would rather focus on anything other than the UK’s dire record on poverty. But with public opinion showing the highest support for increased taxes and spending on welfare in 14 years, they may find that once epidemic has passed, temporary sticking plasters will no longer be enough.