‘Falling through cracks’ or ‘left in limbo’ – fixing the holes in our safety net

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27 Apr 2020

Tony Wilson, Institute Director

Follow @tonywilsonies

The welfare state has rarely felt so big.  With last week’s news that one in four workers have been furloughed through the Job Retention Scheme and 1.8 million have made new claims for Universal Credit, added to the three million self-employed workers eligible for Self-Employment Income Support, it’s likely that around twelve million people are now receiving some form of government relief as a result of this crisis. 

To put that another way, it’s plausible that less than half of the working age population is currently working – with getting on for a third being supported through a radically expanded welfare state. These are mind-boggling numbers, and as we’ve said before it’s a credit to the government and the civil servants in HMRC and in the Department for Work and Pensions for putting this all in place so quickly. 

At the same time however, recent weeks have seen growing complaints of workers ‘falling through the cracks’ of the different schemes.  Principal among these are the self-employed – with the Institute for Fiscal Studies estimating that around 900 thousand may miss out because they started their business in the last year or because their profits exceeded £50,000.  Up to two million more company owners may also have little or no entitlement, because they pay themselves mainly in dividends with often only small salaries. 

Added to these however, a large number of employees are also missing out – in particular where they moved jobs just before the lockdown and so weren’t on payrolls in time to qualify for the furlough scheme.  To their credit, the government responded to initial concerns by moving the cut-off for eligibility from an original date of 29 February to 19 March.  However in order to qualify, workers must have been included in a PAYE return by this date, and not simply have started employment – which means that those paid monthly are likely to continue to miss out. 

Our estimate is that in all, around one hundred thousand workers may have slipped through the cracks in this way – starting a new job in March, paid monthly, and laid off due to Covid-19.  This is based on analysis of the Labour Force Survey, which shows that around half a million people start a new job every month (as employees), while we know from the Annual Survey of Hours and Earnings that three quarters of all jobs are paid monthly.  With 27% of all workers furloughed, it’s likely that one hundred thousand may have missed out (and quite possibly more, given the high turnover in some furloughed sectors).

Added to this, a further half a million people who would normally have been expected to start a new job in April have been left in limbo by the lockdown.  Many will have been told that their new job no longer exists or that its start would be delayed.  Those moving jobs would likely have already served notice on their previous job, and so find themselves relying on the goodwill of their ‘old’ employer to keep them on as furloughed staff, or left to apply for Universal Credit.

So despite this massive reform and expansion of the welfare state, there are still well over a million workers who are missing out.  So what should be done? 

For the self-employed, one simple step would be to extend the Self-Employment Income Support Scheme (SEISS) to those who started their business in the last year, which could benefit 600 thousand people. For employees, extending the cut-off for the Job Retention Scheme (JRS) to 31 March would be welcome (and the risks of fraud by employers, nearly a month on from the cut-off, would be vanishingly small).  However this will likely make only a small difference, as in practice many of those who were due to start jobs will simply have been told that those jobs no longer exist, or will have been laid off before they reached any PAYE return. 

The reality, then, is that the JRS and the SEISS simply cannot fix every problem or plug every gap.  But nor should they, because we already have a universal social security system that is intended to act as a safety net for those in need.  The trouble is that it has holes in it: particularly for those with higher housing costs or larger families, even after the welcome increases announced last month. 

So rather than introducing or tweaking new benefits, the government needs to look to improve our existing social security benefits to ensure that they can provide adequate, immediate and short-term support for those who don’t ‘fit’ within the JRS and SEISS. 

First, and most straightforwardly, the government should lift the benefit cap and the ‘two-child limit’.  The stated aim of the cap was to incentivise those on benefits to spend less and seek work.  But as both the IFS and charities and faith groups have argued, even if governments may have wanted to make this argument in the past it surely cannot apply in the current crisis.  The same goes for the two child limit, which removed the ‘child’ elements of Universal Credit for third and subsequent children.  Both caps need to be removed, at least temporarily.

Alongside this, we also need to look again at the generosity of benefits for those with high housing costs.  The government last month increased the maximum support available for private renters to the thirtieth percentile of local rents, but it’s already becoming clear through advice services that many of those newly out of work have rents well above this level.  These households have no way to reduce their rents during the current crisis, so instead see their Universal Credit swallowed up through rent payments.  The limit needs to rise, ideally to the median local rent – at least for the next few months.

Lastly, there’s also a strong case for raising the savings threshold in Universal Credit, as the Resolution Foundation has argued.  This ‘capital test’ sees benefits reduced for those with savings of more than £6,000 and removed entirely for those with savings above £16,000.  While on one level it may seem reasonable to ask people to use their own savings before relying on the state, it cannot be fair in the current crisis to penalise those saving for their future, or for a deposit for a house, in this way.

All three of these measures may have had their justifications in the past.  But this crisis is unique, and these policies now have created gaps and traps that many households have simply no means to avoid.  The government deserves huge credit for its economic response to the crisis, but we need to go a bit further now and fix the holes in our safety net.

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Any views expressed are those of the author and not necessarily those of the Institute as a whole.