The pandemic has not caused inequality in the UK-it will only make the situation worse. But what happens next is not inevitable.
This is an article in the third issue of New Economics Magazine.You can read the full question Here
The past year has been extremely difficult for all of us. More than 4 million people in the UK have tested positive for the new crown virus, and more than 150,000 have died from the virus on the death certificate. In March 2021, 2.7 million people depended on job seeker allowance or universal credit, compared with 1.4 million in March 2020. In the past year, 11 million people took a vacation at some point, which means that many people have lower incomes than usual. The pandemic prevented us from seeing friends and family, and forced many people to isolate themselves from society. It caused the worst economic recession since World War II and exposed the long-standing weaknesses of British society, such as our severe inequality, low wages, insecure jobs, and weak safety nets for people struggling to make ends meet. But it also increased public interest in change and showed us the interconnectedness between all of us.
The pandemic is exacerbating problems that existed as early as 2020. For example, black, Asian, and minority workers are three times more likely to be unemployed during the crisis than white workers. At the same time, in 2020, 90% of UK city councils have increased their use of food banks, and low-income people are most likely to be fired and reduced wages.
Many current economic forecasts are very optimistic. The Office of Budget Responsibility (OBR) predicts that by the second half of 2022, the UK economy will return to its pre-pandemic size, which will be the fastest recovery from recession in 50 years. But these forecasts may be too optimistic.
This is because, first of all, the economy will face the edge of a cliff when the vacation plan and the temporary £20 universal credit are cancelled in the fall. Many people who work on vacation will find themselves unemployed and can only rely on a more meagre social security system. Even if the government implements tax relief on investment, given the amount of debt assumed during the crisis, many companies will still struggle to survive, let alone invest. Although many families saved money during the pandemic, these are usually high-income families and they are more likely to use the money as savings rather than use it all for recovery. In contrast, low-income households are more likely to see their savings decrease rather than increase during a pandemic.
Second, if the current government does not change its obsession with reducing public deficits, it may not invest enough stimulus funds into the economy, which will eventually stifle our recovery. Even financially conservative organizations such as the Organization for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF) believe that we should not worry about government borrowing until the economic recovery proceeds smoothly. Although the cost of government borrowing has increased in recent months, it is still very low, and most of the funds borrowed by the government during the COVID-19 pandemic are locked in at very low interest rates. Although there are limits to the amount of government borrowing responsibly and sustainably, these are determined by complex macroeconomic dynamics. They cannot be simply reduced to a number, such as the debt-to-GDP ratio that the Chancellor of Finance is obsessed with. The government increased borrowing at a very low interest rate to guide the economy through a once-in-a-lifetime crisis. This is not the cause of panic. Long after the end of the economic recession, the economic scars of the damage to people’s livelihoods pose a greater threat to the future of the UK’s economy.
But none of this is inevitable. The government can choose to build a stronger, fairer, and more resilient economy—it should start by appropriately supporting people living on the lowest incomes. Before the pandemic, our social security system provided the third-lowest approval rate among rich countries. For example, if people who work in Luxembourg with a national average wage are unemployed, they will receive 86% of their wages a year ago through the welfare system. In the UK, this proportion is only 34%. Our government temporarily increased universal credit by £20 a week, but this is not enough: even with the increase, about one-fifth of people and one-third of children in the UK still live in poverty. At the New Economy Foundation (NEF), we found that about one-third of people live in households with too low an income to meet their daily needs.
A strong social safety net does not only mean that we can live with dignity when we are struggling-it benefits everyone, regardless of economic security.Support people’s income during a recession, when they are unemployed and rely on social security, like the so-called ‘Automatic stabilizer”. When people with the lowest income receive extra money, they usually spend every penny, which is different from people with higher incomes, who are more likely to save money or invest in overseas assets, etc. This means that a proper safety net can provide economic stimulus, because it allows households to continue to spend money on goods and services even during economic downturns, thus having a good ripple effect on the rest of the economy.
“… The pandemic has also increased public interest in change and has shown us the interconnectedness of all of us.”
One way to ensure that this happens during a pandemic is to introduce a minimum income guarantee: pay at least £227 a week to everyone who needs it so that they can afford basic living expenses such as food and housing. But income guarantees shouldn’t just deal with pandemics. To some extent, it should become a permanent feature of the British social security system, so we will not return to one of the weakest safety nets in all rich countries. After the pandemic, we can fully fund this income guarantee by making our taxes more progressive. This could mean making income taxes more fair, or taxing wealth income at the same tax rate as work income—the current tax on wealth income is about half of wages.
Although a strong social security system can directly support people, helping companies also support people by providing jobs. During the crisis, the government took a series of measures for troubled companies, including vacation plans, grants, a large number of low-interest and publicly guaranteed loans, and tax deferrals. This means that when the economy begins to recover, many British companies are ready to grow. However, just like the family, Covid’s impact on the company is also very unequal. While some companies—and even many small businesses—have been able to increase their cash reserves during the crisis, other companies—especially in industries severely affected by the coronavirus, such as the hotel industry—are still struggling. Currently, one in nine companies has little or no confidence in their ability to spend the next three months, and as many as one-third of companies with Covid loans may have difficulty repaying. Across all sectors, smaller companies are more likely to get into trouble because they have more limited ways to raise capital than their larger counterparts.
High levels of commercial debt, especially debt used to pay for cash flow problems rather than investment, may hinder future business investment and the company’s ability to develop. This is because the profits of these companies must be used to pay interest, not to invest in improvements. This, in turn, may curb corporate spending and income, thereby hindering the UK’s economic recovery. If the company encounters any short-term revenue decline in the future, high debt may also make the company more likely to go bankrupt.
The government should provide debt relief for companies in industries severely affected by the new crown virus, including some debt relief for companies with emergency loan debts or rent arrears. This kind of support can give priority to SMEs.
But this is not enough for companies to continue to grow-as we emerge from the crisis, the government must also invest to help promote recovery and create new jobs. Now, there are three unemployed people for every vacancy. Investing in new jobs can not only support people’s livelihoods, but also prepare the economy for long-term challenges such as the climate crisis and an aging population.
According to data from the Institute for Public Policy (IPPR), the United Kingdom has set a goal to reduce its carbon emissions to zero net value by 2050, which will exceed our current expenditure by £33 billion in public funds. This £33 billion will not only help the government achieve its climate goals, it will also allow many people to return to work. At NEF, we estimate that investing 28 billion pounds in green infrastructure — such as energy efficiency, reforestation and transportation — within 18 months will create the equivalent of 400,000 full-time jobs.
“Let us not waste the opportunity to build a fairer and more resilient economy: where we can meet our daily needs, provide appropriately funded public services and a healthy environment. “
The government will have to spend money to get us out of this recession. But the government should not only focus on household and business income when making stimulus decisions. It should also develop a longer list of quality of life indicators—as they did in New Zealand. This may help to use public funds for critical public services that have been underfunded in the past decade. For example, the per capita expenditure on adult social care in England in 2020 is 8% lower than in 2010. At NEF, we estimate that between £1.5 and £20 billion will be spent on social infrastructure in 18 months, such as nursing staff, nursing assistants, and teaching assistants – will create 700,000 equivalent full-time jobs, improve lives, and help rebuild public services . This will also reduce the pressure on underfunded committees in terms of paying for social care. Finally, employment has the added benefit of low-carbon. Therefore, between green infrastructure investment and public service investment, we can create more than one million low-carbon jobs.
Despite the challenges, the government has intervened unprecedentedly in the economy in the past year. With the introduction of the vaccine and the relaxation of the blockade, our thoughts turn to the future, and we have a golden opportunity to build a fairer and more sustainable economy. But the government must have the right goals and show greater ambitions and a vision for a better future than it has so far. The government still has a lot of work to do to protect families, companies, and jobs. Economic crises are devastating, but they also provide political opportunities for real change. Let us not waste the opportunity to build a fairer and more resilient economy: where we can all meet our daily needs, provide appropriately funded public services and a healthy environment.
