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Immense hardship makes consumer led recovery the biggest risk of all

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This week’s budget sent a clear message – the government think households don’t need support to start spending again. While firms need support to splash the cash before tax rises come, households don’t. This is a big risk, and it completely ignores the millions struggling due to the pandemic.

One of the startling features of this week’s budget was how little support it offers to struggling households. Instead, it points towards positive headline figures on household finances. This reflects an argument put forward by some, such as Andy Haldane at the Bank of England, that the economy is ready to recover as soon as social restrictions are lifted. There’s talk of a new roaring 20s, those who have saved money from not being able to socialise or go on holiday, and/or not having to commute, splashing the cash as soon as they can.

But it seems risky to rely on this hypothetical spending for a recovery. For two reasons: first, millions are struggling rather than saving, and second, it’s not guaranteed that those who have saved want to spend. We need investment and support for struggling households, a stronger safety net, and ambitious job creation to ensure we have an economic recovery that works for everyone. It’s vital that we both build back better and do so in a way that tackles the inequalities further exposed and exacerbated by the pandemic.

Many households are struggling

The budget documents show that on aggregate, households are saving up money and household finances look strong. But the headline stats don’t tell the full story.

It’s mostly households at the higher end of the income distribution, as well as retired households, that have seen significant increases in their savings. Households at the lower end of the income distribution have seen savings fall. This chimes with recent TUC research that found the finances of low earners have been hit hardest by the pandemic. And disabled workers, black and minority ethnic (BME) workers and women were all more likely to report a hit to their household finances.

It’s clear that while some households, mainly higher earners, have saved, there’s plenty of people struggling. The Resolution Foundation estimates that 750,000 households are behind on rent payments, an increase of 450,000 compared to before the pandemic. In October 2020, Citizens Advice estimated that 6 million adults have fallen behind on at least one household bill during the pandemic. An estimated 3.5 million people have fallen behind on council tax - a particular concern due to the harsh collection methods used.

And a record high number of people are turning to foodbanks during the pandemic. Trussell Trust, the foodbank network, reported its busiest ever summer in 2020, with 1.24 million food parcels handed out in Apr-Sep 2020. This is a 47% increase on the same period last year.

Struggling households ignored

These households were ignored by the budget. The only debt support announced was a vastly inadequate £3.8 million no-interest loans pilot scheme. There was nothing new for renters, or any attempt to seriously address council tax debt.

The government has extended the £20 uplift to Universal Credit until October, but as the Joseph Rowntree Foundation (JRF) point out, this will mean benefits face a cut just as the furlough scheme ends and unemployment is expected to peak. JRF estimates that removing the uplift in October will pull 500,000 people including 200,000 children into poverty. There were some other minor tweaks to Universal Credit, but the cruelty in the system remains, and the £20 uplift was not expanded to legacy benefits.

While the furlough scheme has been extended, there’s still no protections built in that would stop people on the scheme being paid less than the minimum wage. Low-paid workers are the most likely to be furloughed on reduced pay, and the lack of protection against pay dropping below the legal minimum meant that two million employees were being paid below the minimum wage last April.

Why spend?

The second concern is that there’s no guarantee that those who have saved will spend. We went into the pandemic having experienced a 12-year real pay squeeze (which the OBR now expects to last until 2026 at least). And just before the pandemic hit, the households saving ratio (household savings as a proportion of household disposable income) was incredibly low while household debt was record-breakingly high. Some of those who have saved, potentially for the first time in their working lives, and paid off debts may not be keen to throw caution to the wind as soon as restrictions are lifted.

And those who were more comfortably off before the pandemic might see little reason to spend the extra money they’ve saved. It’s notable that the Bank of England is split on this. Andy Haldane, the Bank’s Chief Economist, views the economy as a “coiled spring”, with consumers confident and ready to spend as soon as they’re vaccinated. In contrast, Gertjan Vlieghe, a member of the BofE Monetary Policy Committee, is more pessimistic, viewing the situation as “highly uncertain”. A particular concern is that it’s higher earners, which tend to spend less of any additional income, that have saved.

Proper support helps the wider economy

If the government is relying on a consumer-led recovery, it needs to support the people hit hard by the pandemic rather than ignoring them. It’s both the economically and morally right thing to do. It can this do by improving pay, strengthening the safety net, creating jobs and addressing the growing debt crisis. This will help ensure consumer spending, and help to address the inequalities worsened by the pandemic.

Starting with pay, low-paid workers have been hit hard by the pandemic. They’ve been more likely to be furloughed on reduced pay, more likely to have to rely on our shockingly low statutory sick pay, less likely to be able to work from home, more likely to have fallen into debt due to the pandemic, and more likely to die from Covid-19. This is all while often not being paid enough to live on. A £10 minimum wage will benefit 9.4 million employees, including 3.7 million key workers, and ensure that everyone earns a living wage.

Alongside this, the government must scrap the public sector pay freeze. A pay freeze for public sector workers, and meagre pay rises for nurses, are both wrong and economically nonsensical when you’re hoping the economy recovers through consumer spending.

OBR estimates unemployment will hit 2.2 million in late 2021. The government must do more to stop this by investing now to help create good, well-paid jobs in the coming years. Research carried out for the TUC by Transition Economics reveals that fast tracking spending on projects such as broadband, green technology, transport and housing could deliver a 1.24 million jobs boost by 2022, and the TUC has set out plans to fill and create 600,000 jobs in the public sector.

If unemployment is set to rise, it’s urgent that the government overhauls our broken social safety net. It must be transformed so it actually supports those who need it. This includes raising both Universal Credit and legacy benefits to at least 80% of the national living wage (£260 per week), ending the five-week wait by converting advance payment loans to grants, and scrapping the two-child limit, benefits cap and no-recourse-to-public-funds rules.

We also need a more extensive package to support household finances. It’s scandalous that the government chose again not to introduce decent sick pay for all, which would ensure no one fell into debt due to having to self-isolate. A package of support must include statutory sick pay being increased to the equivalent of a real living wage.  Alongside this, we need a fully funded freeze on council tax debt repayment, support for renters, and an increase to the short-term hardship funding provided to councils while also establishing a permanent fund that provides a source of grants. Ideas such as cancelling council tax debt and providing the outstanding money to councils should also be explored.

It's not good enough for government to hope pent up demand saves the economy. Instead, it must support those hit hardest by the pandemic, and invest in public services and infrastructure to help guarantee the demand is there.

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