BLOG: Why ending the Universal Credit uplift could hit the economy

Wednesday will mark Rishi Sunak’s second Budget as Chancellor. In his first, he acted quickly and decisively, introducing many measures to mitigate the worst economic effects of the covid-19 crisis. These included the furlough scheme to protect jobs, and a £20 a week increase to Universal Credit to help those most in need get through, among others.

A year later, much has changed, but we are at a juncture no less critical. While in national lockdown we clearly need protection like this to continue - it would make no sense to let businesses go bust and families reach breaking point at one of the final hurdles.

But economic stimulus (an increase in government spending relative to taxation) should continue a while after restrictions ease too, to ensure businesses get back on their feet and no more jobs are lost than can be avoided. The changes to supply chains caused by Brexit makes this even more necessary. So far the UK has spent the equivalent of 26% of our pre-crisis GDP (the total value of goods and services produced in a year) on economic stimulus. For comparison, Germany has spent 40%.

Clearly once the economy recovers this will need to be paid back. This should be done by tax increases, rather than the huge and damaging spending cuts to councils, government departments, and benefit claimants that defined austerity between 2010 and 2018. This crisis has had a very varied effect on household’s finances - while many have been laid off, others have spent less of their salaries and been able to save more. So those in well paid work can afford paying a bit more tax.

But for now, what’s the best way to stimulate the economy? The Chancellor might announce another Eat Out to Help Out style scheme, or a cut to business rates (the local tax businesses pay for occupying land). But a far better option is stimulating the economy via the welfare system.

The additional £20 a week Universal Credit entitlement has been critical to many G15 residents, allowing them to make ends meet over the past year. This must be extended for at least another year. This will not only let families in the most need avoid terrible hardship, but will also support businesses and the economy, because the money will be spent on goods and services.

Research by the G15 shows how the £6bn it would cost to extend the £20 a week uplift might be recycled in the economy. Using data about what lower income households spend money on, we can see which sectors will be most affected.

Take food, for example. Household spending on food would account for around £850m of the £6bn uplift. To put that in context, that’s over a quarter of supermarket giant Iceland’s yearly revenue. Iceland employs 30,000 people.

Another way of contextualising how this spending can support business is to look locally. Based on the latest claimant count, current claimants in the London Borough of Brent benefit £37m over the course of a year from the uplift. This is the equivalent of 57 times the average London small to medium size business turnover, which could mean many businesses could be saved by extending the uplift.

Clearly not all of the uplift would fall on small to medium size enterprises (SMEs), just as not all of the part spent on food would fall on Iceland. But if payments to claimants around the country were to fall by £20 a week before we can recover from the economic shock the coronavirus has caused, we can be sure that businesses would be hit as well as the households who’d be spending the £20 on them. And if those businesses lay off staff, that will mean more hardship, and more spending on the welfare bill.

Stimulating the economy via Universal Credit makes sense on many levels. Households avoid destitution, businesses get more customers, and government targets support where it is needed most. The Budget should get this done.