9 June 2020 – Session: 9.29am – 11.46am
Torsten Bell, Chief Executive, Resolution Foundation; Paul Johnson, Director, Institute for Fiscal Studies;
Dr Gemma Tetlow, Chief Economist, Institute for Government; Giles Wilkes, Senior Fellow, Institute for
Chair: Rt Hon Mel Stride MP
Mel Stride MP asked if the Government could have targeted the measures to help the employed and self-employed more effectively. Paul Johnson agreed gaps in reach affected possibly 200 million company owner/managers, 650,000 self-employed who had set up since April 2019, 200,000 self–employed earning more than £50000 a year, together with employees who had moved jobs too late to be entitled. The scheme was very broad and unsophisticated to provide income replacement to a large number of people. Other measures could have been taken. The Scottish Government had helped the recently self-employed. More could have been offered for higher earning self-employed. There could also have been claw back for those who received Universal Credit (UC) and an amount under the self-employment scheme. The difficulties in rolling out as quickly as the Treasury had acted at the beginning of the crisis were hard to determine but the measures had not been honed during the crisis. The extension of the scheme had not been differentiated by sector, understandable given the newness of the activity for the state. However a generally generous and broad brush approach had resulted in some people doing well but left out others. Mr Stride asked about challenges of targeting sectors after October. Mr Johnson said the key challenge appeared to be identifying firms, as some straddled more than one sector. However he believed identifying those firms which had some employees in certain sectors ought to be possible with firms self-certifying how many employees were in each sector. The whole scheme was largely dependent upon self-certification by employers. Torsten Bell said the defining feature was Government insurance against the pain and speed of a labour market shock for households. He agreed there was rough justice within the elements of the schemes. He raised the differences in treatment of people who had been fortunate enough to be furloughed against those who had lost jobs or had hours reduced. People furloughed were receiving an average of 90% replacement rates, but loss of employment and receipt of UC resulted in half of income, reduced to a third for single people. Mr Stride asked if the situation had been too complicated to take account of the issue when the Government had to move at speed. Mr Bell understood why a partial scheme had not been feasible at the beginning but welcomed the bringing forward of partial furloughing to July which was a key element of protecting incomes and supporting recovery. Sectorial differential variations would be difficult and crude justice but the crisis inherently affected sectors. Sectorial variation was six times as high as during the financial crisis. Italy already had sectorial variation plans and the Spanish were considering similar schemes. Dr Gemma Tetlow agreed, saying the speed of the Government’s response was an early indication the priority was to maintain jobs. The policy contrasted with some other countries associated with an earlier loss of jobs, some of whom had been rehired since the introduction of wage subsidies. The UK approach to furlough those who could not work at all during the crisis was in contrast to Australia and Ireland where wages subsidies were paid regardless of part time working. Eligibility was about the revenue hit to businesses rather than whether employees were working or not. Giles Wilkes suggested, if time had permitted, the Government may have preferred to base the scheme on revenue fall to businesses. However he believed being effective during a crisis was incredibly important and being generous at the beginning was better, with those unfairly rewarded addressed later. In a liquidity crisis, obtaining money immediately was critical and he believed the Government had made the correct decision.
Mr Stride raised the issue of dividends not included in the calculations for self-employment income for furloughing due to the complexity. Mr Bell said dividend income was not broken down in tax returns. Additionally agreeing to include some dividends but not others would lead to unfairness. Putting in place a more complex system to address the issue would make the situation technically possible but could not be run on the automated system. Each case would have to be dealt with individually and bigger fraud risk would require more checks.
Mr Stride asked about the Government’s approach to loans and the resulting debt for companies. Mr Wilkes said the correct approach had been taken at astonishing speed. A crisis such as coronavirus had not occurred before. The speed of the Coronavirus Business Interruption Loan Scheme (CBILS) programme was initially criticised in comparison to some European countries but was due to structural features and lack of history of direct lending from the state. The Treasury had been receptive to comments and adjusted gaps and solutions. Ongoing loans were a significant problem. A scheme for a short, deeply impacting crisis would be very different from a scheme for an ongoing crisis with more structural change in the economy. As time passed, guarantees and subsidised lending from the state could start damaging the fabric of the economy by keeping unsustainable companies alive. Money would not be repaid. The speed at which the Bounce Back Loan Scheme (BBLS) had been applied for was a warning sign, with 750, 000 small companies receiving £20 billion. Significant levels of bad debt, unfairness and inefficiency was apparent. Lack of commercial scrutiny applied to the loans meant many would not be recovered. Mr Johnson said the response to business had almost entirely been through loan schemes. Some businesses would collapse with the guaranteed loans, particularly bounce back loans. Mr Stride raised views that much of the debt should be written off. Mr Johnson believed that would be the end result. However a lot of businesses were potentially taking on other debt to meet unavoidable fixed costs and could face long term problems. The Chancellor could be considering how to prop up otherwise viable companies who faced problems with Government and private debts. Mr Stride asked about measures for debt collection. Mr Bell said income-contingent repayment was an option rather than write-offs. Balance sheets for a lot of companies had been impaired, affecting company behaviour and labour market recovery. History showed balance sheet recessions had weaker recoveries than income shock recessions. Lack of clarity about recovery of the loans had an impact on behaviour over the early phase of recovery. Challenges were not removed until there was complete clarity about dealing with the debt. At present there were mixed messages that the loans could be written off whilst the banks were being told not to taken into account any losses during this phase of the crisis.
Angela Eagle MP raised the likelihood of significant levels of unemployment. Mr Bell agreed. Even the Office for Budget Responsibility’s (OBR) relatively optimistic scenario forecast 9% unemployment in the second quarter of 2020, not including the impact of phasing out the Coronavirus Job Retention Scheme (CJRS) which was likely to cause a further wave into unemployment, particularly as 2 million people employed in the hospitality sector were on CJRS. Talk of a V-shaped recovery and ease of relocation between sectors had been overemphasised. Unemployment peaking at 10%, with an average fall in unemployment after recessions of 0.7% per year, would mean a full 7 years needed for unemployment to reach 5%. In the financial crisis, once unemployment had reached 7%, levels did not return to previous levels for 5 years. History showed unemployment bouncebacks were slow, despite recent optimism from the USA. The key difference in the USA was that people were already counted as unemployed. The beginning of recovery in the UK would mean people would come off the furlough scheme. Although unemployment in the UK was at present much lower than the USA, the underlying inactivity was similar. The hospitality and retail sectors were generally the quickest to bring people back into employment but would not be able to do so in the current crisis. In the financial crisis, there had been inflation and a depreciation of sterling which resulted in real wages falling, lessening the amount of unemployment. However, there was no inflation spike during the current crisis and assumptions of the relationship between GDP and employment could not be relied upon. Ms Eagle asked if the CJRS was a hidden form of unemployment. Ms Tetlow said a quarter of the labour force was being supported through the CJRS. The fraction of those people who would become unemployed was difficult to determine. The answer would mainly be due to structural changes to the UK economy and areas which were no longer viable. The Government should have concerns that some sectors may not return after the crisis with workers needing to be reallocated elsewhere through training rather than allowing long term unemployment. The structure of UC and Department for Work and Pensions (DWP) would be challenged to address retraining programmes. Ms Eagle asked how the Government could create efficient, useful and popular national training schemes. Mr Johnson said some training schemes of the 1980s had a negative effect. Lessons had been learned about active welfare-to-work policies. Unemployment would not be geographically focused. The importance of the hospitality sector in London could be addressed by other employment opportunities, although coastal areas may experience more problems due to a weak labour market. Some relatively effective job subsidy schemes existed. Most effective training happened with employers, rather than stand alone government schemes. The active welfare-to-work schemes in Job Centre Plus would be crucial with some direct Government investment for employment schemes and job subsidies. A particular focus should be on school leavers and those leaving university this summer. Some additional support for employers taking on apprentices could be important but significant Government intervention would be needed to keep apprenticeships at current levels. Mr Wilkes said quality of apprenticeships was crucial which meant willing employers and real jobs. In addition to the lack of people in the schemes, the problem had been quality and the schemes were regarded with low esteem.
Steve Baker MP sought views on options for the Government to bail out companies. Mr Wilkes said normally an approach would be not to bail out companies if the private sector was unwilling to invest. The situation would have to be highly idiosyncratic. Normally Government bail outs were bespoke, such as the steel industry, and there would not normally be systemic bail outs. However the current situation was different. The Treasury would need a strong and consistent rationale and belief there had been a systemic and long term structural problem of underinvestment which had been suddenly accelerated by coronavirus. Forecasts showed the small business sector could be underinvested by £40-50 billion which would lead to a balance sheet recession, slowing recovery. Addressing the issue on a systemic basis was difficult, with potential measures such as income contingent investment where unconventional loans were allowed with payback contingent on future profitability, generally raising the level of equity investment in the country. The UK’s lack of state banking meant having to work through the private sector with a slow process of vetting and checking. In the current unprecedented situation, the private banking sector would prioritise maintaining cash. The issue was extremely difficult and was preferable to leave to the private sector. If the Treasury was sure the macro economy would recover, Government effort should be focused on intervention for specific long term structural issues or national priorities. Mr Baker suggested the losses by companies were due to necessary state intervention, not to market phenomena. Mr Bell believed the Government was hoping the economy was strong enough to recover and there would be no second wave meaning the number of firms whose balance sheets were so shocked was manageable. The strategy was understandable but high risk. The impact of a second wave would be different for lockdown and for companies. Previous recessions had been driven by economic phenomena and economics could answer the underlying causes. However economics could not remove the economic damage of coronavirus which relied on a health response. Economic policy was bearing more uncertainty than normal which needed to be recognised. He gave an example that loans to pubs would not be feasible in a second wave of the virus and a view needed to be taken as to whether some should be allowed to go bust. Financial stability pressure was not emerging in the system as the state was taking the stress by underwriting household income and revenue hits from lockdown. If that did not happen in the second wave, the financial stresses would be material. Mr Baker asked if the UK was becoming more of an interventionist state. Mr Johnson replied a good bail out was not just about protecting large, influential companies. A risk from the crisis was concentration of market power as large nationals and multi-nationals would be able to survive. A competitive economy required smaller firms to survive. He agreed the case for income contingent plans. Mr Bell agreed there had been an increase in market share by large companies following the financial crisis and the risk was greater following the coronavirus crisis.
Criteria to ease lockdown
Ms Eagle asked about criteria for easing lockdown. Ms Tetlow replied the main concern of the Government’s five tests had focused exclusively on risk to life from coronavirus. Whilst clearly important, other impacts such as deaths from other causes and loss of income were not included. The five tests did not prioritise the Government’s objectives and actions which drove policies on easing lockdown, making the basis for Government decisions difficult to understand. Ms Eagle suggested the Government needed to be more transparent on the basis of decision making. Ms Tetlow said there were high uncertainties around the disease and easing lockdown. The Government could be clearer on translation of particular scientific advice into future response, such as the areas of the economy to be opened up and which restrictions would be lifted. In contrast, New Zealand had a list of levels of crisis which clearly mapped restrictions in place for each level. Ms Eagle asked whether the economy could afford a second wave caused by easing lockdown too early. Mr Bell said there was a judgement call given the uncertainties on the R rate. A second lockdown would be materially worse for the economy, with less retention of staff, and businesses realising the situation could not return to the previous normal. Another lockdown would be expensive and economically damaging. Modelling showed large increases in the deficit, with 22% in a 6 month scenario and 38% in 12 month scenario which was unprecedented, although policy changes would be made during that time with less generous furlough and self-employed payments. More burden sharing could reduce the size of the state’s deficit. Modelled debt was 129% for 6 month scenario and 167% for 12 months. However yields on Government borrowing were falling, cover ratios were very high and Bank of England quantitative easing was broadly in line with the increase in Government debt. The net effect was debt service to revenue ratio stayed well below the 6% Government threshold. Ms Eagle asked if the effects of the coronavirus crisis on the economy could be used to produce a more sustainable, greener and better economy. Mr Johnson replied opportunities had not been capitalised upon in previous crisis. The 1980s recession had led to a transformed but highly unequal economy. Few changes had been made after the financial crisis in 2010 resulting in a decade of slow growth. Society had become increasingly aware of skills of essential workers which could result in better technical and vocational education. The importance of the green sector to the economy and reliance upon public services had been recognised. Significant choices would need to be made over public services such as maintaining the more generous elements of UC and housing allowance. Opportunities to consider the tax system should be taken. Taxes should not be raised in the short term but, given the scale of the deficit and increased demands for spending on health and public services, taxes may have to be increased and the structure of the system reconsidered. Mr Wilkes added the state could direct economic activity to find jobs for people who had been in specific sectors which now had less demand. Green investment to meet net zero carbon targets would require labour.
Siobhain McDonagh MP asked if the Government should support an expanded social housing programme. Mr Bell replied the crisis had impacted on housing. Private renters were generally 50% more likely to have fallen behind on rents in comparison to mortgages, driven by occupations and the ease of mortgage holidays which lenders had an incentive to offer. 10% of renters had tried to delay payment of rents with only half being successful and renters relied on the Government policy for mitigation. A housing programme could not help with short term pressures of high housing costs whilst incomes fell. Social security system needed to meet the gaps. He did not believe increases in local housing allowance (LHA) would be removed next year, given the large numbers who would have become unemployed. Some groups would miss out, such as those with high rents before becoming unemployed would have a rent gap not covered by the state. Although benefit caps were exempt for the first nine months, lots of people would be dependent upon housing benefit for a longer period. Social housing was beneficial for long term housing need and economic stimulus. Previously too much emphasis had been placed on subsidies to house builders to provide social housing, rather than focus on housing associations who were in a position to begin building now. Ms McDonagh asked about changes to spending priorities in view of impacts to society from coronavirus, in particularly to assist children. Mr Johnson agreed there had been a worrying impact on children’s education. Children attending private schools were much more likely to have online teaching than those from state schools, particularly less affluent ones. Children from more affluent backgrounds were spending considerably more time on structured learning. There were barriers to poorer children, partly due to the lessons being offered by schools, space in homes, support by parents, and access to internet. Consequences could have a negative effect on educational attainment so importantly children should return to school as soon as possible with additional hours of teaching and support, particularly for those from less well off backgrounds. Support in school would be the most important way to help. If children were not fully back to school from September, additional internet access support could be required. Ms McDonagh asked if local authorities should be protected under the next Spending Review. Ms Tetlow said the Government’s expected Spending Review due in autumn seemed increasingly unlikely because of uncertainties of pressures for the next few years. Local authorities had faced increased pressures before coronavirus, particularly on adult and children social care services. Grants from central Government had been cut significantly but social care had become the largest proportion of local authority work. Budgets had already been squeezed with difficulties in meeting social care pressures and local authorities required more money. Coronavirus had added to the pressures, such as changes to the way care homes operated. Mr Wilkes said previous Governments had worked out the amount which could be borrowed and the political constraints on tax with the amount left over divided between public spending. The amount for local government was simply what was left, rather than working out what budget was needed. The most important innovation by Government would be to start with the question of what needed to be spent. Ms McDonagh asked if the Government should review the triple lock on state pensions which accounted for 44% of welfare spending. Ms Tetlow replied a decision had been made after the financial crisis that reductions would be made to working age welfare spending. The triple lock was a poorly designed policy which did not meet objectives. The policy stated the level of state pension would be increased each year by the highest of either price inflation, earnings growth or an arbitrary 2.5%. The state pension continued to ratchet up unpredictably, so in the longer term pressure was put on finances but did not encourage younger people to save. Mr Bell gave an example of the OBR predicting average earnings with slight falls this year but an increase of 18% next year. The state pension could not be feasibly be increased by 18% next year and therefore the triple lock would have to be removed. The problem was not over generosity to pensioners during previous years but the policy was in direct contrast to working age benefits and increasing poverty. Ms McDonagh raised concerns that two of the largest beneficiaries of the COVID-19 funding scheme, CNH which made lorries, and BASF, the giant German chemical company, had paid no corporation tax during the past year and asked if businesses which had made no contribution should be able to access state funded support. Mr Wilkes said corporation tax was paid by companies in profit and sometimes companies genuinely did not make profit. If the suspicion was that the companies were incorrectly stating profits to avoid tax, the issue should be addressed as a separate matter. Circumstances around each company were idiosyncratic and, in the emergency of the crisis, the risk of redundancies had to be taken into account.
Rushanara Ali MP asked how the Government should support the hardest-hit sectors such as hospitality and leisure. Mr Bell said of manufacturers which had closed, 36% expected to open within the next two weeks. Accommodation and food was only 12% with recreation and the arts at 4%. One policy to fit all would not work. Some small business with properties such as cafes had had grants, rather than loans. The main aim was to support workers by helping the companies manage the crisis by removing the wage bill. The level of uncertainty about future demand after lockdown and changed behaviours was key. Giving the affected sectors more time to realise where future demand would settle was desirable, which was why the Chancellor had been correct not to ask for high employer contributions from August. Rent adjustment for businesses in the face of shocks was not in place. Large businesses were putting themselves into a form of administration and then using that as a mechanism to renegotiate rents. Moving to revenue contingent rents during the crisis would make sense with the Government providing more clarity to encourage landlords to accept temporary lower rents. Ms Ali compared the UK with apparent progress to return to normal in Germany. Mr Bell was nervous about headlines stating Germany had returned to normal. Germany had witnessed a relatively benign opening up due to health risks having reduced significantly quicker than in the UK. Ms Ali asked about levelling up, listing future unemployment, protest about injustices and high death rates among black and minority ethnic (BAME) communities. Mr Johnson explained levelling up had been focused on geographical inequalities which may not be widened by the crisis. Some prosperous areas had many hospitality and retail jobs. Some more prosperous local authorities were dependent on income streams which had now reduced. Inequalities could be exacerbated within areas and between rich and poor and ethnic groups. The underlying areas for levelling up may not have changed. Being in London may become less important for work than previously so benefits enjoyed by London could be more widely spread. The most important focus for investment may involve broadband and the capacity to work online. Education had been under focused, with the biggest difference between the richest and poorest areas of the country being the numbers of those with higher education. Ms Ali suggested existing inequalities were shown in death rates but asked if new inequalities were emerging due to the Government not supporting those in need. Ms Tetlow said those who had not been covered by the support packages tended to be the high income groups which could actually be reducing inequalities. However young people who were entering the labour market were likely to be badly affected by the state of the economy which could have lasting effects on earning opportunities but so far little had been done to help. Existing inequalities for those who lived in more cramped living conditions with less ability for their children to learn but more risk of transmission of the virus could be exacerbated by the crisis. Mr Wilkes shared concerns that the disease seemed to proportionally disadvantage certain groups, with health effects and the nature of employment. Levelling up had been meant to be geographical but was simply a slogan for the election campaign, without having worked out how to achieve the aim. Ms Ali suggested there were large differential effects for those with low incomes, around gender and race and she asked about policies, including an income guarantee for young people. Mr Bell said lower earners were bearing more economic and health risks which would continue as lockdown was eased and control diminished. The current 18-24 year old group were facing job losses and furloughing. Future young workers were not supported at all and those trying to enter the job market without degrees would face significant long term effects on earnings. Looking only at incomes appeared to show everyone was affected equally badly but those at the top of the income distribution were more able to reduce spending with financial distress at the bottom of the income distribution. Those at the bottom would have more debt whilst those at the top could increase savings. Mr Johnson explained an erroneous assumption had been more women than men would have been furloughed. However mothers were more likely to have lost jobs or reduced hours. Ethnic minorities, for example Pakistani and Bangladeshi men, were more likely to work in shut down sectors with many self employed. Black groups were disproportionately represented in key worker occupations. Stark differences were being witnessed.
Alison Thewliss MP asked for views on the new normal after the virus. Mr Bell was sceptical about claims office working had ended. The trend which had been emerging pre-crisis for professionals to work some of the week from home would continue at pace. The big changes were high levels of unemployment and the size of tax rises. Mr Wilkes shared the uncertainties. He was concerned about the effects on London of the combination of reliance on public transport and other areas where people had to be in close proximity such as the entertainment sector having a significant impact. Human ingenuity could get round individual issues such as having a meal in a restaurant but the combination of effects could be significant long term. Ms Thewliss asked about environmental benefits. Mr Wilkes agreed positives could be seen, particularly if the government held its nerve on transmission to electric vehicles. Ms Tetlow added how much adaptation to ways of living had happened before the disease diminished would be a factor. The outcome would be different for people in different parts of the country, particularly when relying on public transport to reach work. Returning to working in offices seemed unlikely now technology had enabled remote working for some. Ms Thewliss asked if people would move to jobs done from home. Ms Tetlow said the situation would depend on the mix of skills required and the attractiveness. Ms Thewliss asked what changes to Government operations would be desirable. Mr Johnson replied the speed of economic response was impressive suggesting parts of Government worked well. Other parts of Government would be under real strain, with Job Centre Plus having many more people to deal with in a much harder labour market. Government would have to help people return to work. There had been a lack of clarity about the end of lockdown and risks for employers going forward. Ms Tetlow said the policies of HMRC, DWP and Government which were able to be rolled out quickly had been chosen. UC system had coped well with the increased demand. She would provide written evidence. Ms Thewliss asked if the crisis would lead to changes in regulations. Mr Bell said the cause had not been economic. The recognition low paid work had been undervalued by Government policy and public attitude was an area for potential change. There would be increased spending for the NHS. The UK’s high death rate seemed to be due to 20 years of failure to deal with social care. Financial regulation on low pay and social care would result to deal with the long standing problems. Ms Thewliss asked about interaction between the OBR and Treasury. Mr Bell said the OBR had been a good innovation over the past 10 years but was designed to deal with normal times outside of crisis. The Treasury had outsourced forecasting which worked in normal times but was more of a problem when Government had to make fast decisions. He welcomed the OBR’s initiative to provide a forecast but would have been preferable to have set out a variety of scenarios due to uncertainties of the crisis. Policy should be better adapted to the uncertainties.
Comparison with the financial crisis
Mr Stride raised views that recovery from the pandemic crisis would be quicker and easier than experienced in the financial crisis. Mr Bell did not agree unless a vaccine emerged in the very near future. Short term epidemics in individual countries could pass through quickly but global pandemics could have long lasting effects until the health issues were resolved. A reallocation of supply and demand to a new normal whilst awaiting a vaccine was needed, with a further reallocation afterwards. However the people who would need to be reallocated did not tend to travel for work or to move locations. Mr Johnson agreed the situation depended upon how quickly the virus disappeared. There were reasons to be optimistic if the virus disappeared soon as no fundamental economic problems had been revealed. The UK was dependent on other countries managing the virus and on global supply chains reopening. Macro economics suggested impacts from other countries were part of the negative impacts in the UK. Ms Tetlow agreed the answer was how quickly the virus could be eliminated. Mr Wilkes believed policy makers appreciated the demand side had to start working again. The base line of a long, slow recovery would not be tolerated and there was a more optimistic outlook and a more expansionary mindset which could result in a better performance than during the financial crisis