Last week the Bank of England predicted that the UK economy will contract by 14% this year, which would represent the deepest recession in more than three centuries.
To many people, these economic statistics don’t mean much. But the consequences in the real world will be severe: someone, somewhere, will be forced to suffer a major financial blow. The question is: who should he be?
At the moment, it is clear who is being asked to shoulder the burden of the crisis. 7.5 million people have in vacations as part of the government’s job retention program, many of which experienced a 20% drop in income. Others weren’t so lucky: A wave of layoffs has already led more than 1.8 million new people to apply for universal credit, which in many cases will provide an income of just £ 94 per week.
Although the government says it has introduced measures to take the pressure off household spending, these have so far been limited to payment “holidays” on mortgages and personal debts. However, vacations are not a direct sacrifice of income on the part of creditors: payments are deferred rather than waived, and must then be repaid with additional interest. In terms of cash flow, vacations represent a transfer of wealth from debtors to creditors.
Tenants were particularly exposed. Although the government has made some changes to the local housing allowance, these will inevitably disappear big gaps between actual rents and housing assistance for many low-income tenants. At the same time, the government’s approach to tenants so far has assumed that landlords can be trusted to “be compassionate” and tenants can negotiate with them on a dime. ‘equality. Government advice says that when the crisis is over, landlords and tenants will “work together to agree on an affordable rent repayment plan” – seemingly oblivious to the significant power imbalances that exist between them.
Many businesses are also suffering. Although the government has provided direct cash assistance to businesses (e.g. through the Small Business Grant Fund) and extended corporate rate relief, the main pillar of its response has been to allow businesses to take on debt. more easily, many will find it difficult to repay. The government’s flagship coronavirus business interruption program protects lenders, not borrowers: Businesses that fail to repay their loans will always go bankrupt, while lenders can recover 80% of the loan’s value from government (and now 100% for smaller loans).
By putting all of this together, a common image begins to emerge. As Christine Berry, Shreya Nanda and I describe in a new report for the IPPR, while many households and businesses face serious financial difficulties, there is almost complete financial protection for the income of the “ rentiers ”: that is, the returns obtained by extracting from the value of owning scarce or monopolized assets. While there are many different sources of annuitant activity in the UK economy, perhaps the two most important are donors and financial services.
In the absence of substantial rent and debt relief, a significant portion of the money injected into the economy by the government will end up channeling to banks and homeowners. We estimate that 13% of state spending on the job retention program is likely to end up in the pockets of homeowners – or £ 2.8bn under a three-month freeze. When mortgage and loan repayments are added, that adds up to 45% of total spending, or £ 10bn. This is on top of the £ 23 billion already paid to homeowners each year through housing assistance.
Compared to the significant challenges faced by others, the income protection of annuitants is striking. Since rent payments will not be reduced in the long run, landlords are not asked to share the burden of the economic downturn. Banks that offer payment holidays don’t sacrifice any long-term income, since they collect missed payments with interest. The coronavirus business interruption loan program significantly protects banks against losses on crisis loans, while continuing to take full advantage of the rise in these loans without limiting interest rates.
Rather than being shared across society, it is clear that the risks and economic costs of foreclosure are borne disproportionately by those who are already financially vulnerable. Those less able to overcome the crisis are asked to make sacrifices to protect the incomes of those who are most able to overcome it.
In many ways, this shouldn’t be surprising. Most government response measures essentially put more money into a system designed to produce uneven results, without changing the power relations within that system. In the absence of measures to actively correct these inequalities and ensure a more equitable sharing of the risks of crisis, the UK’s economic recovery is likely to be slow, uneven and unfair, exacerbating existing structural imbalances.