Falling through the cracks

The government have tweaked and fiddled, reversed and reviewed, extended and amended, but it isn’t working. Millions of people are set to fall through the cracks in the emergency job and income protection schemes. They will land on one of the most inadequate social safety nets of any advanced economy. Our new forecast modelling, prepared for this briefing, has found that the number of people falling below the ​“minimum socially acceptable standard of living” this November is likely to have reached an eye-watering 20.6 million – that’s around three out of every 10 people. This is a rise of 800,000 compared with the end of the summer (September 2020). Worse still, this is set to rise further by the end of winter (April 2021), to a total of 22.5 million – 2.5 million higher than was seen in September this year.

The evidence pointing to a crisis of living standards has been building for some time. An estimated two million workers saw their earnings dip below the minimum wage during the first wave of the pandemic. The number of people claiming universal credit doubled in the space of a couple of months (Figure 1), and food bank use soared. In the end, the slew of hastily assembled crisis protection schemes were not enough to paper over the cracks of the UK’s threadbare safety net, starved of resources after a decade of austerity.

Figure 1: The number of people claiming universal credit has doubled over the year to date, rising particularly rapidly from March to May.

But of the many different statistics used to illustrate the current economic emergency, few get to the crux of the crisis of living standards better than the minimum income standard (MIS). With the rise of in-work poverty muddying the waters of traditional employment-based measures, the MIS cuts back to basics. It sets the bar at a ​“minimum socially acceptable standard of living”. The Joseph Rowntree Foundation (JRF) have consulted with the UK population and, with the Centre for Research in Social Policy (CRSP), run the numbers to produce a meticulous methodology for estimating a minimum standard of living on a family-by-family basis (Table 1).

Table 1: The minimum income standard defines the amount of weekly income required to achieve a ​“minimum socially acceptable standard of living” and varies based on household characteristics.

Minimum weekly income standard thresholds for 2020 across four household typologies.

Source: JRF and CRSP, 2020

Note: Like JRF and CRSP, we present results with and without housing and childcare costs, because in practice it these costs vary significantly across households and regions of the UK.

In applying this methodology, their research makes for grim reading. In the latest historical data (the 2017/​18 financial year), an estimated 18.7 million people lived in households falling below the minimally socially acceptable standard of living. Within this, JRF show that 11.2 million people were in households living on less than 75% of the MIS. This threshold is seen as important because households with incomes below 75% of the MIS are four times more likely to experience deprivation than those above the MIS.

Recent pressures on household finances

Two primary factors are now driving up the number of households living below the minimum income standard.

First, some households have lost income due to being placed on furlough. The job retention scheme only mandates that workers retain 80% of their normal salary, and only a minority of employers voluntarily top up this income. In some cases, universal credit (UC) can also provide a small top-up to those on furlough, but in almost all cases this does not fully replace lost salary.

We estimate that the number of people on furlough during the second wave will reach 4.5 million, a slightly more conservative estimate than that put forward by the Resolution Foundation (4.7 million) but still a very significant rise compared to mid-October (just over 2 million). Our figure assumes that most sectors will be able to sustain their productivity at a higher level than during the first lockdown. This means sectors directly impacted by lockdown (for example arts, recreation, retail, and food services) furloughing at levels seen in May-July, and less impacted sectors furloughing at rates seen in August.

Second, households have lost income due to unemployment and a loss of working hours. Underpinning our analysis are the Bank of England’s forecasts for unemployment. In Q4 2020, they predict an unemployment rate of 6.3%, up from 3.9% at the start of year, and equivalent to a net increase of around of 840,000 people during 2020. Because demand is likely to remain suppressed, unemployment is expected to continue to rise throughout the first half of next year, peaking at 7.75% in Q2 2021 (Figure 2). In addition to this, many people who have not lost their jobs have still lost work. The Resolution Foundation estimates that 4% of workers have lost more than 10% of their income despite not being furloughed, primarily due to a reduction in working hours.

Figure 2: Unemployment rates are expected to grow significantly in late 2020 and early 2021 as the economic crisis, and associated policy failures, really begin to bite.

Most of the vulnerable group described above, who have lost jobs or work, will be eligible for universal credit. But UC tends to replace only a small proportion of previous earnings by international standards, typically 50% or less. This is even after accounting for the temporary improvements announced in March 2020, including a £20 a week uplift in universal credit and working tax credits, and increased entitlement for the self-employed. Furthermore, a significant minority of the population will not be eligible for universal credit because they will hold savings over £16,000, or because they are already on an alternative ​‘legacy’ benefits. And even those who are eligible face significant challenges in receiving the benefit – by default there is a five-week wait before benefits are started. Advance payments can in some cases shorten this waiting time, but these need to be paid back out of future welfare payments, creating benefit debts for families already struggling.

Forecasting families below the MIS

To understand the impact of all these factors over the coming months, we used the Institute for Public Policy Research (IPPR) tax and benefit model to assess how many households will fall below the MIS threshold this winter across the UK. First we take labour market and economic data for September 2020, in order to estimate the number of people below the MIS shortly before the second lockdown was announced (Table 2). Using the forecast estimates discussed in the section above, we then model new labour market data for November 2020 and April 2021, in order to track the number of families falling below the MIS both at the start of winter during lockdown, and at the end of winter after the expiry of the furlough scheme.

Table 2: The number of people living in families with incomes below the MIS is set to rise rapidly this winter.

Total number, proportion and change in the number of individuals living in families below the MIS, selected months for 2020 and 2021.

Source: NEF analysis using IPPR Tax and benefit model, with inputs derived from the Office for National Statistics (ONS) and Bank of England.

Notes: Our April 2021 ​“UC uplift” scenario assumes that the £20 a week increase in the main rate of universal credit and working tax credits is extended beyond March 2020. We do not assume that any other temporary changes to benefits are extended. All modelling was completed prior to the publication of Office for Budget Responsibility (OBR) November forecasts. The discrepancies between the OBR November forecast and our model forecast were minor, including a slightly higher unemployment rate in our model (for example 0.25 percentage points higher in April 2021), but also slightly higher minimum wage rates in 2021, with these effects likely to broadly cancel one another out.

The results lay bare the challenges being faced by millions of people this winter. The number of people falling below the ​“minimum socially acceptable standard of living” is likely to have reached an eye watering 20.6 million this month (November 2020). That’s three out of every 10 people in the UK, and a rise of 800,000 compared with September. Worse still, this is set to rise further by the end of winter, to a total of 22.5 million people living below the MIS by April 2021, and 13.3 million below the threshold for especially high risk of deprivation (75% of the MIS). That’s an increase of 2.5 million and 2.6 million, respectively, on September this year.

The modelling also shows that the temporary improvements to UC and tax credits have had an important financial impact for families. If the policy were to be extended beyond March 2021, around 800,000 people would be lifted above the MIS who would otherwise be below. But the analysis also shows that extending this temporary measure is not enough. It would not be able to prevent a further rise of 1.7 million people falling below 75% of the MIS compared with September (Figure 3).

Figure 3: Extending the £20 uplift in universal credit to 2020/​21 would prevent just one third of the increase in those falling below the MIS.

Notes: Our April 2021 ​“UC uplift” scenario assumes that the £20 a week increase in the main rate of universal credit and working tax credits is extended beyond March 2020. We do not assume that any other temporary changes to benefits are extended. All modelling was completed prior to the publication of OBR November forecasts. The discrepancies between the OBR November forecast and our model forecast were minor, including a slightly higher unemployment rate in our model (for example 0.25 percentage points higher in April 2021), but also slightly higher minimum wage rates in 2021, with these effects likely to broadly cancel one another out.

The solution – building towards a living income with a minimum income guarantee

To avert this crisis in living standards, we are renewing our call for a minimum income guarantee (MIG) this winter. We are currently working on more long-term proposal to replace universal credit with a new ​‘living income’ for the UK, but given the immediacy of the current crisis we recommend government moves quickly with cruder reforms in the short term.

Our latest proposals are broadly similar to those set out in March 2020, and are designed to be implemented at short notice while still being potent enough to catch everyone who would otherwise be at risk of falling through the cracks in the UK’s safety net. In summary, we propose a temporary MIG with the following features:

• Value: Every working-age adult would be entitled to apply for a weekly payment worth £227 per week. This is equal to the value of the 2020 minimum income standard (estimated by the JRF and the CRSP) for a single adult, excluding any housing or childcare costs. The government should address housing costs and childcare costs separately and directly, as we have proposed in the past.
• Administration: For existing claimants, the top-up to their current benefits would be automatic and would not interact with the benefit cap (in effect the benefit cap would be suspended). New claims for MIG through sick pay would operate on the same basis as sick pay today – with an effective increase in sick pay to £227 per week. For all other new claims, the MIG award could be made through the advance payment system of UC. This facility would be used to make the new main adult payment of £227 per week, while foregoing an assessment period and therefore the five-week wait and any earnings or savings tests. This payment should also not be deductible from future benefit awards (but may incur an additional future tax rate for higher earners – see below). Further awards in UC, for example for housing, children and disabilities, would be paid on top in the usual way.
• Entitlement: Initial entitlement to the MIG would be extended to all working-age adults who wish to apply via the advanced payment system in UC. Claimants would also be able to apply for and receive their MIG payments while receiving support from other income protection schemes, but the MIG payment will only top up post-tax income to a combined maximum of £227 per week for those already receiving support from these schemes. For anyone who receives a MIG payment but is not otherwise eligible for UC or other income protection schemes, any payment received from the MIG that takes disposable income above £227 per week should be repaid in additional tax in the 2021/​22 fiscal year – effectively turning the MIG into an interest-free loan in these cases.
• Cost: Our illustrative modelling shows that the additional cost of the MIG for existing benefit claimants would come to around £6bn a month. For every additional 500,000 claimants of the MIG, the marginal cost above what they would have received from the present benefit system would be a little under £450m a month.

Rarely have so many people suddenly and simultaneously experienced the same fears over how they will feed their families, how they will heat their homes and whether they will have jobs to return to in the new year. These proposals will help to ensure that everyone can live in dignity during the worst of the pandemic.

Find out more about NEF’s Winter Plan for Jobs, Incomes and Communities, including the minimum income guarantee.

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