The government’s economic recovery plan must recognise the inequality exacerbated by coronavirus

Analysis: Any plan to fix Britain’s economy that focuses too much on those who have been able to save during the pandemic risks leaving the rest further behind, writes Ben Chapman

The government is expected to lay out plans to stimulate the economy this week (AFP)

Rishi Sunak has been praised for the Treasury’s approach to tackling the enormous economic fallout from coronavirus.

The furlough scheme, which has the paid wages of 9 million people, has generated a particularly large number of plaudits for the chancellor, and rightly so.

But his recent comments give cause for concern about the government’s approach to supporting the economy as that vital lifeline comes to an end and up to 2 million more people are expected to be out of work.

In an interview with Bloomberg, Sunak said: “This is not a typical economic crisis, where incomes are hugely impaired.

“Because of the furlough scheme protecting incomes, and because we’ve essentially stopped people from going out, we’ve shut down large elements of discretionary consumer spend.

“It’s probably less that income is the issue and more that psychology is the challenge. The most important thing for the economy now is to reopen it and for confidence to return.”

However, incomes have actually fallen quite sharply, with median earnings down 4.3 per cent between February and May, erasing 18 months of gains. This pain has been shared far from equally.

There were 612,000 fewer people on company payrolls last month than before the pandemic and benefit claims have more than doubled to 2.8 million.

Clearly these people have seen their incomes hit very hard indeed. The UK’s out-of-work and income support payments remain among the least generous in Europe, with a recent increase failing to make up for years of cuts.

A single person aged under 25 on universal credit receives £342.72 a month, just a quarter of what they would earn in a minimum-wage job. In France, payments are typically 57 per cent of a person’s previous salary.

This matters for everyone because, if millions move from work – or furlough – to benefits, they can afford to spend much less, delivering a further significant hit to businesses and jobs across the country.

People out of work during the pandemic are disproportionately young and had been in low-paid jobs, a trend likely to continue over the coming months with hospitality and retail forecast to shed more staff. They are less likely to have savings to fall back on.

The chancellor’s assessment, which presumably informs his plan to support the economy, appears to reflect an experience which has been enjoyed mostly by the wealthy.

Sunak pointed to billions of pounds in additional savings squirrelled away since the start of lockdown as evidence that households’s finances were in relatively rude health and the problem was primarily one of getting people to spend.

Figures released on Monday by the Bank of England show that collectively we put away £56bn since March and paid off billions more of credit card and loan debt.

But here again, the aggregate data masks a broad array of very different experiences.

Among the top fifth of earners, 38 per cent have seen their incomes remain steady while their outgoings have fallen, according to the Resolution Foundation’s research. Much of this is likely to be made up of the discretionary spending which Sunak refers to, things like restaurants, entertainment and holidays.

Just 12 per cent of the bottom fifth of earners have seen their finances strengthen in the same way. More of this group have lost their jobs or been furloughed, and because more of their earnings pay for essentials they have less spending to cut back on.

So the risk is that by October, we have, very broadly, two groups.

The first is fairly wealthy. They worked from home, saw no hit to their salaries, went out less, didn’t go on holiday, maybe paid off a credit card or loan and put away some extra into their pension.

The second is younger, lower-paid with little or no savings and is now out of work (or recently graduated) and claiming benefits with few prospects of finding a job.

Given these stark differences, some of the proposals under consideration such as a VAT cut and extending the Bank of England’s mandate to focus on growth, look like blunt instruments. Both might boost overall economic growth but may not help those who need it most.

In terms of boosting the economy it makes more sense to put money in the hands of the least well-off (who have to spend most or all of their income) than it does to to put it in the hands of the relatively wealthy, who tend to stash it away for retirement ro a rainy day, as appears to have happened over recent months.

There is no guarantee that Sunak’s focus on opening up the economy will give people who have money to spend the confidence to spend it, especially when many are still scared of the virus.

And any plan to fix Britain’s economy that focuses too much on this group, risks leaving the rest further behind.

In this context, the most effective policy would be a jobs and training guarantee, as proposed by the Trades Union Congress (TUC). This would ensure that public money is targeted at those in greatest need and it would prevent the long-term damage caused by being unemployed at a young age.

In March, the chancellor praised the TUC for its help in developing the furlough scheme, and this week the prime minister promised a “Rooseveltian” effort to get Britain back on its feet.

What could be a more worthy successor to Franklin D Roosevelt’s New Deal than a young, state-sponsored workforce helping build the green infrastructure that the UK so badly needs?