Eve Poole provides an analysis of the UK's household debt, and proposes a temporary solution in the form of Universal Basic Income (UBI)
Following the first cases of Covid-19 in the UK in January and February, lockdown was announced on the evening on Monday 23 March. Since then, citizens have been working from home, except for keyworkers, or have been laid off or furloughed under the government’s Job Retention Scheme. As at 12 May, 7.5 million jobs have been furloughed, and the British Chamber of Commerce reported that 71% of businesses surveyed by them had furloughed some staff. This means that the UK government are currently paying the wage bill for about a quarter of all UK employees. The scheme will be gradually phased out, with some part-time working and employer contributions, finally ending in October.
The economy has taken a huge hit. The decline in GDP in 2020 is likely to be the largest since WW2. The Office for Budget Responsibility and The Bank of England have published scenarios of a GDP fall of 14%, which compares rather badly to the 4.2% fall during the financial crisis in 2009. As an example, in April and into May, retail footfall was down by 75-80% compared with a year ago. Claims for the Universal Credit benefit increased by 2.5 million between 16 March and 5 May, and The Bank of England projects the unemployment rate rising to 9% in the second quarter of 2020, compared to 4% before the crisis. Many think this is optimistic, given that the US is already on 15%, having not deployed the policy option of a job retention scheme to slow down the rate of layoffs.
None of this is good news for the economy, but it is very bad news for household debt. Before the crisis, government data reported that household debt had peaked in Q2 2008 at 147% of household disposable income. It then declined to 124% by late 2015. But growth in household debt levels accelerated from early 2016, and the debt-to-income ratio had risen to 128% by mid-2017. In Q3 2019 it stood at 126.8%. Already, the Financial Conduct Authority had established that 12% of UK adults (5.9 million people) have no savings and investments at all and that a further 37% (19.1 million people) have savings or investments of less than £10,000; meaning that almost half of UK adults either have no savings or ones less than £10,000 in value. In particular, of those in the most vulnerable financial category, 3.7 million said that their household could only continue to cover living expenses for under a week if they lost their main source of income, without having to borrow money or to ask for help from friends or family.
A survey in March showed that 49% of those polled expected to have difficulty in paying bills, with 57% of those working saying their earnings were lower than in the previous week. In May, the Citizens Advice Bureau reports that an estimated 6 million people have already fallen behind on a household bill due to Coronavirus. 4 million people have fallen behind on rent, council tax or on utility bills where they will have little protection from debt collection when temporary protections on enforcement expire. It is true that many utility companies, banks and landlords have offered payment holidays for lockdown, which is very welcome. But these arrangements merely defer and delay payments rather than cancel them, which means they will be mounting up, presenting many households with a need either to reschedule their payments to render them affordable, or the prospect of being unable to meet the sudden increase in payments once the holiday ends.
These are not the feckless debts of a bling generation, these are cost-of-living debts. Those in the clutches of the high-interest lenders were already using these clear and simple, readily available and impersonal on-line loans to finance rainy-day purchases. In 2014 research by the Competition and Markets Authority suggested that the average payday loan is for around £260, lent over 30 days. Reasons for these loans fell into three categories. While some were used to finance living costs, they were most often used for emergency expenses including the repair or replacement of cars, boilers, and white goods. The other major category was seasonal, particularly the need to buy Christmas presents, or new school uniform and shoes for a new term. Very few were for more frivolous expenditure, for example a last-minute holiday or luxury item. This suggests that a cushion of just £300 savings might enable most households to avoid these kinds of emergency loans.
Looking forward to a post-Covid, post-Brexit Britain, the future looks very bleak, particularly for the financially vulnerable. Even the less vulnerable may now be cautious about post-lockdown spending, just when the economy needs a boost. So my proposal is for the UK government to introduce a year of Universal Basic Income (UBI), which would provide both cushion and spending. Those who do not need it should be invited to donate it to a charity of their choosing, because the UK’s charities too are suffering unprecedented falls in income, with many set to close.
First mooted in Thomas More’s Utopia in 1516, UBI is defined by lifelong champion Guy Standing as ‘a modest amount of money paid unconditionally to individuals on a regular basis; intended to be paid to all, regardless of age, gender, marital status, work status and work history’. Many countries around the world are experimenting with it. Since 1982, residents in Alaska are paid an annual Permanent Fund Dividend, funded by a share of the profits from the state’s oil industry. Last year, the payment amounted to £1,300 per citizen. This is in comparison to the recent pilot in Finland which awarded 2,000 randomly selected unemployed people with an income of around £500 month; and the 2019 proposal by Guy Standing that the UK rate should be £48 a week. A report by Reform Scotland suggested giving adults £100 per week and children £50 per week. Modelling conducted by the RSA for their report on a basic income for Scotland found that in Fife, a basic income of £2,400 a year would reduce relative household poverty by 8.5% and half destitution. A basic income of £4,800 a year would reduce relative household poverty by 33% and end destitution completely. Foodbanks could become a thing of the past.
Malcolm Torry argues that UBI could be funded through a 5% rise in income tax, while the New Economics Foundation proposes scrapping the tax-free personal allowance to finance it. Others have argued that it could largely be financed by the reinvention of the current benefits system.
My more modest proposal is to introduce this for a year only, as part of the Covid-19 recovery plan, both for its short-term effects and in order to test it properly as an option for the future. It would therefore need to be carefully designed to maximise its potential to generate useful research data. It might also be used to model a separate ‘gap year’ product in the tradition of National Service, whereby every citizen in the future would have the right to a year off, to use for volunteering and citizenship, or perhaps to re-train or re-skill.
Opposition to UBI tends to centre around two key issues. One is moral hazard, and the other its political irreversibility. The latter argues for a very clear Covid-related one-year programme to permit a political u-turn should the experiment not work. The former argument is less easily dismissed. Would citizens abuse the system and would it drive dependency and idleness? Is there any evidence that these schemes in fact work? As a Christian, I hear these concerns, but I hear the moral arguments more loudly. While the economic results of the recent UBI pilot in Finland were unremarkable, one finding stood out for me: ‘the basic income recipients were more satisfied with their lives and experienced less mental strain than the control group. They also had a more positive perception of their economic welfare.’ Given the mental ill-health effects of Covid-19 and lock-down, a year’s UBI would be a gracious way to honour the dignity of the citizen and say thank you for their efforts to protect each other during the pandemic.
Thanks to Andrew Phillips for help with research.
Eve Poole is Third Church Estates Commissioner, and the author of Leadersmithing, Capitalism's Toxic Assumptions and Buying God. She's a contributing member of Jubilee Centre's post-coronavirus task force on debt.