Covid-19· Incomes· Living standards· Labour market· Welfare Key take-aways from the Chancellor’s package of measures to support workers in the coronavirus crisis 22 March 2020 by Mike Brewer and Laura Gardiner Mike Brewer Laura Gardiner The Chancellor’s announcements on Friday 20 March were unprecedented in their scale and reach, and absolutely vital for supporting firms and family incomes in the face of the current crisis. Here are five key take-aways on how these changes will affect families, and three next steps for the Government to consider. 1. At a stroke, the Chancellor has reversed 30 years of retrenchment to unemployment benefits, boosting out of work incomes by over £1,000 per year Having recently fallen to their lowest real-terms value since the early 1990s, the main adult rate of unemployment benefits is now at its highest ever level, as the chart below shows. Relative to average earnings, it is at its highest level since 1998-99. This change to the benefits system alone raises incomes for out-of-work benefit recipients by £20 per week, or £1,040 per year. Crucially, this change means that ‘replacement rates’ – the levels of net income that families maintain when members fall out of work – are improved: Prior to this policy change, a single renter working full-time on the National Living Wage (NLW) would have retained 56 per cent of their net income when falling out of work and claiming benefits. With the Chancellor’s announcement that figure rises to 63 per cent, due to a £20 per week increase in out-of-work income (with no change to in-work income). Prior to the change, a couple with two kids in which one person works full time on the NLW would have retained 64 per cent of net income in the event that this person stops working. With the Chancellor’s announcement, that figure rises to 66 per cent. In the second example, the increase in the replacement rate is more modest because this family was already in receipt of benefits while working, and boosts across Universal Credit (UC) and tax credits increase the generosity of in-work benefits to the same extent as out-of-work awards (£20 per week in each case). This in-work benefits increase is important for those who hold onto at least some earnings (or sick pay, or pay via the new Coronavirus Jobs Retention Scheme, discussed below). Such broad-based income boosts for both those in and out of work will help reduce the scale of the coming recession by reducing falls in consumption that would otherwise amplify the scale of the economic shock. 2. Re-linking Local Housing Allowance to local rents provides a further boost to benefits – by more than £50 per week in some places – but not in areas where rents have grown slowly The changes to Local Housing Allowance (LHA) and to the support for renters in UC will effectively reverse the cuts to LHA made since 2012. They mean that LHA rates will be set at levels that mean housing support from the benefits system is sufficient to cover 30 per cent of all rental properties in the local area. In 2012, LHA rates were also set at levels that should cover 30 per cent of all rental properties in the local area; since then, they increased with inflation until 2015, and then were subject to the four-year nominal freeze that affected most means-tested benefits. The change announced by Rishi Sunak on Friday – relinking LHA rates to 30th percentile rents in the area – means that housing support will rise the most in areas where rents have risen fastest since 2012. In areas where rents have risen by very little, the change will have little or no impact (it will also have no impact in inner London, where a separate national ceiling on LHA rates still binds). The table below shows the 20 local areas in Great Britain that will experience the largest and smallest increase in LHA rates (excluding inner London). It shows that the beneficiaries from the change will be those living in areas where rents have grown rapidly in recent years. An out-of-work family claiming UC or Housing Benefit and receiving help with rental costs for a three-bedroom house in Edinburgh (which is in Lothian) or Dartford (in North West Kent), for example, would see awards rise by £50 a week. However, those in the Wirral, Teeside, Aberdeen, Bridgend, North Lanarkshire, Renfrewshire and Inverclyde will receive no increase at all. Other than Lothian (and perhaps Northampton), the 20 areas with the largest increase in LHA rates for a three-bedroom property are all in London and the south east of England. 3. The removal of the minimum income floor in UC will significantly reduce the income hit for self-employed people in lower-income families whose work temporarily dries up The Coronavirus Jobs Retention Scheme announced by the Chancellor will not apply to the self-employed. As a partial alternative, the Government has announced that it will scrap the minimum income floor (MIF) in UC. The MIF means that, when assessing the circumstances of the self-employed, UC assumes that those people whose business has been operating for more than a year earn an amount at least equivalent to 35 hours of work per week on the NLW. This rule is intended both to prevent fraud and to reduce the extent to which UC subsidises unprofitable instances of self-employment. But it is wholly unsuitable in these extraordinary times and the Government was right to scrap it. With this change, UC can essentially play the role of a means-tested unemployment benefit or an earnings-replacement benefit for the self-employed. This change will make a significant difference to some families’ incomes should work dry up for the self-employed. Take a renting couple with two children in which one person is self-employed bringing in around £20,000 per year, while the other works part time on the NLW. Net income is £610 per week (£32,000 per year) after taxes and benefits have been accounted for. With the MIF in place, that income would drop to £360 per week (£18,700 per year) if self-employed earnings fell close to £0. But by scrapping the MIF and treating self-employed people the same as employees, the Government has ensured that net income only falls to £520 per week (£27,200) when self-employed earnings drop off. That’s an improvement in replacement rates from 59 per cent to 85 per cent, a very substantial boost. 4. These changes to the safety net are well targeted at those who need support most, with three-fifths of the income boost going to the bottom 25 per cent While big, these changes via the benefits system are well-targeted at those who need support to protect their incomes most. In spending terms and based on current unemployment and earnings levels, 59 per cent of the roughly £7 billion of additional benefit spending will go to families in the bottom quarter of the income distribution. And in terms of the relative effect on household incomes, the focus on those with the least resources is even greater, as the chart below shows. 5. The Coronavirus Jobs Retention Scheme is a huge step for both protecting incomes and keeping people attached to jobs – and the benefits system will work with it to protect incomes further The most striking announcement by the Chancellor on Friday was a new Coronavirus Jobs Retention Scheme. This involves employees without work being kept on payroll, with the Government funding 80 per cent of their previous wages, up to a cap of £2,500 a month. The costs of this scheme to Government ultimately depend on how many firms take it up, and for how long. We estimate that, should the scheme support one million employees, the Government would be paying out around £4.2 billion over the initial three-month period that the Chancellor said it will run for, as the chart below shows. This scheme is hugely welcome: it reduces costs for firms that cannot afford to pay them, and ensures that staff keep getting paid and remain on the payroll. This will give workers and firms more certainty about how they will get through the months ahead, reducing wage bills for firms and easing the income shock for families. What’s more, employees on the scheme will have their family incomes further supported by in-work benefits. This would happen automatically if the family already receives in-work support, or subject to a new claim being made if not. For example, if a full-time NLW earner in a renting, single-earner couple with two children on UC were moved onto the scheme, his or her gross income from work would fall 20 per cent, from £330 per week (£17,000 per year) to £260 per week (£13,600 per year). But UC payments would rise in response, meaning net income would come in at 96 per cent of previous levels, falling only slightly from £430 per week (£22,400 per year) to £410 per week (£21,600 per year). The Chancellor’s announcements are bold and welcome, but there are further steps the Government must consider in the coming weeks The measures announced on Friday will help stem the rise in unemployment, and strengthen the safety net for those who do lose their jobs. The big priority for the Government following on from the announcement is making the retention scheme a reality as quickly as humanly possible, and encouraging employers to hang onto staff in the meantime. Beyond that, there are three areas of the social security safety net that merit further attention: First, compared to bold policy announcements in other areas, the Chancellor was noticeably silent on sick pay. As we’ve argued before, the Government should extend Statutory Sick Pay to the two million employees who earn too little to be eligible for it, and increase its value. Second, although the removal of the minimum income floor is welcome, this will be of little help to those self-employed people not covered by it because other income in the family or savings deny them means-tested UC. The goal should be a more comprehensive version of the Coronavirus Jobs Retention Scheme that encompasses the self-employed. Logistically this is far from straightforward, but we must explore options creatively and quickly. In the meantime, it may be best to operate within existing systems by relaxing the family income and capital means tests in UC, or by increasing the generosity of contributory Jobseeker’s Allowance and Employment and Support Allowance (which many self-employed people with savings or family income would be able to claim while not working). Third, with around 1.5 million working families (containing over 2 million children) still receiving tax credits rather than UC, tax credits must be allowed to increase when earnings fall due to a reduction in hours (or a worker receiving sick pay, or pay under the retention scheme). These families will gain from the £1,040 per year increase in tax credit allowances, described above. But the Government should go further by swiftly returning to the pre-2012 approach of not having a threshold (currently £2,500) for how much someone’s earnings must fall before their tax credits start to rise to compensate. Continuing to build on and finesse the bold and welcome package that the Chancellor announced on Friday is how we help family incomes through the tough times ahead.