Sunak must extend universal credit or be forced into another U-turn

Right from the start of the Covid-19 crisis the government was never in any doubt about the implications of putting the economy into deep freeze.

The Treasury knew it was going to be bad, so there was a furlough scheme for employees, financial assistance for the self-employed, grants, loan guarantees, a business rates holiday, a deferral of VAT, and a £1,000-a-year increase in universal credit.

The last of these – the £20 a week increase in UC – has tended to be overlooked in recent months as attention has focused on what should replace the furlough, but as things stand the temporary increase will be reversed next April.

Make no mistake, this has all the hallmarks of a slow-burn crisis for the government that it would do well to address while it has the time. Otherwise, it will eventually be forced into yet another U-turn at a moment not of its own choosing.

The Treasury says it is keeping UC under review, but its message is that the extra £20 a week comes at a hefty cost – £9b this year – and that there is only so much money to go round. More for welfare means less for other public services. It is as simple as that.

Except that it isn’t. The increase in UC was supposed to be temporary for the same reason that the furlough was supposed to be temporary: the Treasury assumed that by now the Covid-19 crisis would largely be over and that the economy would on its way to a complete recovery.

Rishi Sunak’s decision last week to beef up his job support scheme was an acceptance that the effects of the pandemic are going to be felt until at least next spring. New restrictions, either through the two-week circuit breaker in Wales or the tiered systems in England and Scotland, mean businesses will close and workers will be laid off. Sunak hopes that most of the closures and the layoffs will be temporary but many of them won’t be.

It’s Sunak’s job to worry about the public finances and there is no question that the government has been borrowing a lot. The deficit stood at just over £200bn in the first six months of the 2020-21 financial year – comfortably a peacetime record. Yet faced with the threat of mass unemployment, the chancellor last week made the only possible decision: to extend the furlough in all but name and ignore the impact on the deficit.

Sooner or later he is going to be faced with a similar decision over universal credit – and if he has any sense he will come to the same decision.

The original increase in UC back in March was the right thing to do. Although no Conservative would admit to it, years of benefit cuts had left the UK’s welfare system unfit for purpose in normal times, let alone during a government-imposed lockdown that was certain to cost many jobs.

Torsten Bell, the director of the Resolution Foundation thinktank, noted last week that low earners have been at the centre of the economic storm. Not only have they borne the highest health risks while higher earners have been working from home, they have been three times as likely to have been furloughed as high earners, and four times as likely to have lost their jobs in the first phase of the crisis.

It’s not hard to see why. Many low earners are in consumer-facing jobs in sectors such as hospitality, tourism and leisure. These are the bit of the economy that faced the biggest hit in the spring and in the case of hospitality are about to suffer another tough period.

Bell adds, though, that income inequality has not changed all that much during the pandemic, with the blow reasonably equally distributed among low, middle and higher income brackets. Why? Partly because those on the lowest incomes were less likely to be working going into the crisis, partly because of the wage top-ups provided by the furlough, and partly because of the cushion provided by UC.

“This increase in income from the state, coming at the same time as the decrease in income from the labour market, meant that the overall incomes of the poorest fifth were close to being unchanged in the first phase of this crisis,” Bell said in an article for the online magazine Tortoise. “Without this policy action they would have fallen a full 8%.”

There is one other reason why Sunak needs to make the welfare system more generous: it would be good for the economy, and ultimately the public finances.

A paper produced by the TUC and the thinktank, the Institute for Public Policy Research, models the impact of either doubling child benefit or increasing the child element of UC by £20 a week. Either measure would lead to a reduction in child poverty, which would be welcome in itself, but the IPPR researchers found there were also sizeable multiplier effects, under which each one pound of stimulus produces more than one pound’s worth of output.

The reason is that the poorest 40% of the population have a higher tendency to spend any extra income than richer groups. Put simply, if you are having trouble putting food on the table, the first thing you do if your UC goes up is to head down to the supermarket. The money feeds straight back into the economy, creating work for food suppliers and cashiers, who in turn spend some of their extra income.

The study estimates that multipliers could be as high as 1.7 or 1.8 for the changes it is proposing. Something for Sunak to consider as he works out when to fly the white flag over UC.