Radical policy changes during Covid-19 crisis should prompt rethink about Britain’s welfare state

@resfoundation – Radical policy changes during Covid-19 crisis should prompt rethink about Britain’s welfare state

Radical changes to the UK’s social security safety net during the pandemic should prompt a wider public debate about its successes and failures, and how Britain’s post-pandemic welfare system can be further improved, according to a new Resolution Foundation report published today (Thursday). 

With the crisis prompting the Government to introduce radical new policies, such as the Job Retention Scheme (JRS) and Self-Employment Income Support Scheme (SEISS), In Need of Support? examines how this reshaping of the welfare state has helped households through the crisis, and what it could mean for future reforms. 

The report notes that, with the addition of these emergency new policies, the UK’s welfare system succeeded in significantly protecting households during the crisis in aggregate. Average household incomes remained broadly flat in 2020, despite the biggest annual economic contraction in over 300 years. 

However, this has only been possible by radically reshaping the welfare state at very short notice, and at considerable cost, with expenditure on the JRS, SEISS and boosts to benefits such as Universal Credit (UC) costing £82 billion over the past year. 

While this exceptional spending is largely driven by the unprecedented nature of the crisis, it also reflects two major inadequacies of the welfare state: the low level of the basic safety net for families, and the lack of earnings insurance (where benefit entitlements are linked to previous earnings) for those experiencing a period of unemployment. 

The first inadequacy is demonstrated by the fact that before the pandemic one-in-four families receiving UC had reduced their food intake or seen meal patterns disrupted due to a lack of resources. This was tacitly acknowledged by the Chancellor’s temporary £20 a week boost to UC at the start of the crisis. 

Measures to address this inadequacy go beyond maintaining the £20 a week boost (cost £7bn). These could include levelling up support for the under-25s (cost £950m) and increasing the child element of UC by £5 a week (cost £1.4bn). 

The report says that the biggest – and arguably most popular – crisis welfare change has been the introduction of earnings insurance via the JRS and SEISS. 

It shows that permanently moving to a new system of earnings insurance – where unemployment support is paid at 80 per cent at previous pay for three months – would be relatively inexpensive at £900m a year, based on 2019 unemployment levels. However, the cost would rise considerably in downturns (to £3.25 billion, based on 2009 unemployment levels). 

This policy would mean those losing their jobs are automatically protected in future economic downturns, rather than having to rely on governments redesigning unemployment support in every crisis, says the Foundation. 

The introduction of earnings insurance could also help address one of the biggest welfare failures of the pandemic – the lack of eligibility to and paucity of Statutory Sick Pay (SSP), which excludes two million employees and is worth less than a quarter of a typical salary. 

Making sick pay available to all employees at 80 per cent of previous earnings (subject to a cap set at double its current value) would cost around £3.1bn a year, if the Government covered 60 per cent of firms’ costs. 

Increasing the adequacy of the welfare safety net and introducing earning insurance could both build on the big welfare success of the pandemic, and tackle some of the system’s lasting failures, says the Foundation. 

However, such radical reforms are far from cost-free, and would need to assessed against other pressures on the welfare state. Providing earnings insurance (which would largely benefit middle- and higher-income households) could only be prioritised after significant progress on increasing the basic value of benefits to prevent poverty. 

How to make the welfare state fit for post-pandemic Britain will be a key topic for the Foundation’s Economy 2030 Inquiry, which it is launching on 18 May in collaboration with the Centre for Economic Performance at the LSE. 

Mike Brewer, Chief Economist at the Resolution Foundation, said:

“After a decade of cuts and reinvention via Universal Credit, the UK’s welfare system has been upended again by the Covid-19 pandemic.

“But the safety net that millions of new welfare recipients have relied upon, from furloughed workers to first-time UC claimants, has been very different – and far more generous – than the system the UK had in place pre-Covid.

“The big challenge now is whether the UK’s post-pandemic welfare system should retain welcome new elements such as earnings insurance, and address key problems such as the low level of the basic safety net and sick pay. Simply returning to the old system is not good enough after what the country has gone through.”