U.K. Set to Scrap £80 Billion Lifeline for the Poorest Families

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The U.K. government is ending two of its pandemic-era safety net programs that pumped almost 80 billion pounds ($107 billion) into the economy, a move that campaigners say will leave more working families in poverty and widen the gap between the rich and the poor. 

Over the next week, furlough support for wages that helped 8.9 million workers at peak and a temporary increase in benefits for about 6 million people both are due to finish. Together, they softened the blow of successive lockdowns and prevented a spike in unemployment.

Ending the two programs piles further pressure on household finances, with growth slowing and inflation picking up. Those trends have left many rank-and-file lawmakers in Prime Minister Boris Johnson’s Conservative Party critical of reducing the universal credit uplift in particular.

“It will have a meaningful impact on household spending,” said Sanjay Raja, a U.K. economist at Deustche Bank in London. “It’s not inconceivable to think that the combination of supply constraints and weaker consumer confidence could tilt the economy into reverse.”

Chancellor of the Exchequer Rishi Sunak introduced both measures as temporary relief when lockdowns shut vast portions of the economy and left millions unable to work. He’s planning to announce grants for people struggling with energy costs in the coming days, a program worth up to 500 million pounds, a person familiar with the program said Wednesday. He has also stressed the need to control the ballooning deficit. 

“With the recovery well under way, and more than 1 million job vacancies, now is the right time for the scheme to draw to a close,” Sunak said in a statement released Thursday. “But that in no way means the end of our support. Our Plan for Jobs is helping people into work and making sure they have the skills needed for the jobs of the future.”

U.K. Treasury’s Remaining Support

• 2 billion pound Kickstart program to put 76,900 young people into jobs
• the Sector-Based Work Academy Program, which has helped 65,000 jobseekers
• Support for employers to take on apprentices
• A Lifetime Skills Guarantee including ‘skills boot-camps’ and funding for adult education
• Recovery Loan scheme, a reduced 12.5% VAT rate in the hospitality and tourism sectors
• Business rates relief
• Local Housing Allowance
• Increases in the National Living Wage

The risk is the toxic combination of lower incomes and higher costs will widen income inequality and fan social tensions. Households also are bracing for a 12% rise in the cap on energy bills due on Oct. 1 and a substantial tax increase in April. Campaign groups say more people will fall below the poverty line or struggle to afford enough to eat.

“We’ve definitely seen a lot of people who have fallen on hard times,” said Alicia Weston, founder of Bags of Taste, which supports people to make cheap home-cooked meals. “We didn’t have this many people who were recently unemployed in the past.” 

What Bloomberg Economics Says ...

“Unemployment is likely to rise by more than the Bank of England expects. We assume people save less to offset some of the fall in purchasing power, but the risk is they don’t and spending takes more of a hit.”

--Dan Hanson, Bloomberg Economics. 

Removing the safety net before the crisis has passed puts the U.K. in danger of repeating the errors of the last recession by pivoting to austerity too early and choking off growth. It’s also starting to eat away at the confidence of consumers, who have helped keep the economy afloat during a tumultuous few years in the U.K. 

“A lot of families are very very worried,” said Rebecca McDonald, senior economist at the Joseph Rowntree Foundation, a research group working on poverty issues. “In terms of what’s going to happen through the next three to four months, that’s going to be families seeing their incomes fall really significantly at the same time as lots of different bills and the costs of essentials increases.”

The issue is high on the political agenda, with some Conservatives joining labor unions and the Scottish Parliament in condemning the move. 

“Many workers in hard-hit industries are still furloughed and need support for longer,” said Trades Union Congress General Secretary Frances O’Grady. “Otherwise, we may see a rise in unemployment.”

The government on Sept. 30 winds up its furlough program, which paid as much as 80% of wages to those whose workplaces shut during coronavirus lockdowns. About 1 million workers are likely to be on the plan when it comes to an end, mainly older people in lower-income groups. All told, the program has supported more than 11.5 million jobs at various times and cost the Treasury 68.5 billion pounds so far.

The question economists are asking is how many of those workers end up unemployed. Some may drift into retirement, and others may already have gone abroad.

Then, on Oct. 6, the Treasury is scrapping a temporary increase in universal credit of 20 pounds a week. Removing that will leave some families around 1,000 pounds a year worse off. While the weekly sum seems small, for 1.2 million universal credit claimants, it represents a fifth of their entitlement, according to the Institute for Fiscal Studies.

Of the two, McDonald says she’s more worried about the cut to Universal Credit because of the number of people who depend on it. About 5 million households receive universal credit, and almost all of them benefit from the temporary increase, which has cost 9 billion pounds so far. Extending it would cost about 6 billion pounds a year and bring the total bill for UC to 74 billion pounds, according to the IFS.

“It’s the wrong thing to do,” she said. “Ending the furlough scheme will have some negative consequences but feels like the right thing to do given the need for it was temporary.”  

Predictions from economists on the damage to the labor market by the end of furlough differ, highlighting the uncertain nature of the months ahead. 

The Bank of England isn’t predicting an increase in unemployment when furlough ends, said George Buckley, chief U.K. and euro-area economist at Nomura. “We do.” 

London was especially hard hit by the pandemic, with more people put out of work than in other regions and more struggling to find employment, an IFS paper published Thursday shows. The capital accounted for 16% of nationwide redundancies during the crisis, up from 12% before. Only 44% of Londoners who lost their jobs found work again after six months, significantly less than the 58% figure for the rest of the country.

The twin cuts has those providing aid to lower income groups bracing for an increase in demand. One of those is Naomi Russell, who set up a distribution point to food banks from her garage at her home in North London during the pandemic and sends out about 40 car loads every week of food and household goods to those in need.

“Taking away of the extra 20 pounds, and the end of furlough scheme -- that’s going to be a big one,” Russell said. “Plus we’re going into winter, people have higher fuel bills. Food’s gone up. We are expecting it to be not good between now and Christmas.”

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