Social security is an important tool to stimulate spending in the economy. Cutting the £20 lifeline in April 2021 would not only hurt families, but also our economic recovery.
The UK is in a deep recession, and the coronavirus storm continues to rage on. We have now had two consecutive quarters of negative GDP growth, and GDP is still 9.2% lower in August than it was at its February peak. Given the status of the health crisis and previous forecasts, it is unlikely that unemployment will return to pre-crisis levels in the next five years.
A return to life in lockdown is already a reality for parts of the country, with other areas likely to follow suit over the coming weeks. Despite strong support to date through the furlough scheme, and newly announced support for those in the highest level of lockdown, the support for areas not locked down is unlikely to be enough to stem the flow of job losses to come.
Given this gloomy outlook, the Government has rightly been looking at ways to boost the economy to help households and businesses weather the storm.
The Chancellor’s emergency investment in social security increased the incomes of households most likely to boost their spending. It is a vital lifeline to keep families afloat and is good for our economy.
Investing in social security can increase consumer spending in a more targeted way than other forms of spending that are often more talked about – tax cuts and capital investment. This is because it is quick to administer and targets money towards those at the bottom end of the income and wealth distribution. Families on low incomes and with low savings, who find themselves struggling to make ends meet, need to allocate more of their budgets to bills and essentials. As such, they spend a higher share of any additional income than those earning more, who can afford to save a greater proportion. When the Government needs to increase spending to support the economy during a recession, investing in social security can be a very effective tool.
The Government did the right thing by choosing to use this tool in response to the crisis to help families stay afloat. The welcome uplift of £20 a week to Universal Credit and Working Tax Credit in April 2020 went some way to offsetting the impact of cuts to social security over the last decade, such as the recent benefit freeze. It put money in people’s pockets that has helped to boost spending over the last few months, both allowing families to put food on the table, pay their rent, and support the economy. However, this increase is currently only temporary, and is due to be cut in April 2021, when the downturn will be far from over. In addition, those on legacy benefits were wrongly excluded from the uplift, yet the same argument for investment in those benefits holds true.
Cutting the lifeline means cutting economic activity in the middle of a deep recession, as well as cutting families adrift
For the very reasons that social security can play a key role in stimulating further spending in the economy, cutting it overnight could have significant negative effects on economic activity.
Families who are receiving these benefits will see their monthly incomes fall, and as a result will likely need to cut back their spending or find other ways to make up the shortfall. A reduction in the level of social security which leads to a reduction in spending, will not only see families going without essentials but it can also have knock-on effects for businesses and worsen the economic situation.
In the middle of a deep recession, we wouldn’t consider tax rises or taking money out of building hospitals, so why would we treat social security differently?
The Government can do the right thing to help families and the economy stay afloat
The Government must keep, and make permanent, the lifeline they rightly extended to millions of households earlier this year. Cutting the lifeline in April would not only have significant impacts for the economy but would mean around 16 million people experiencing an immediate and devastating loss of income, almost 60% of whom are in the bottom three income deciles. Extending the uplift to legacy benefits will benefit a further 1.5 million people, the majority of whom are disabled, sick or carers, and so have been most at risk in this pandemic.
JRF and many other charities, religious leaders and MPs are urging the Government to do the right thing. The Government should keep the social security lifeline to support the economic recovery by making the £20 uplift to the standard allowance of Universal Credit and Working Tax Credit permanent, and extending it to legacy benefits.