On Friday afternoon Rishi Sunak announced that the government would pay up to 80% of wages up to £2500 a month. That is £30,000 a year. He hopes that HMRC will be able to pay all the grants applied for by the end of April. Coronavirus Business Interruption Loans will be available from Monday. Hopefully this will mean that every employer will be able to get the money they need to pay their workers up to £576.92 a week.
He has restored the value of the Local Housing Allowance to the 30th percentile of local rents: the reduced rate from 2011. (It had been the 50th percentile before this.)
However, he is not doing enough for those having to claim benefits. He is only increasing some benefits by £1000 a year (£19.23 a week). A single person’s Universal Credit is increasing from £73.34 a week to £92.57 a week and from 6th April it will be £93.82 a week. Statutory Sick Pay is currently £94.25 a week rising to £95.85 from 6th April.
While the help for those who are still being employed is adequate, it is inadequate for those who are going to have to rely on benefits. The party must call for more to be done for these people.
The first thing which must be done is to continue our call for the five weeks’ waiting period to be reduced to five days.
Secondly, we must continue to call for the benefit cap to be scrapped. There is little point in ending the benefit freeze and increasing Universal Credit for a family of four by £16.35 a month and the Local Housing Allowance by more than £6.02 a week if they should already be receiving £29,983.88 a year but because of the benefit cap they only receive £20,000. They are already £192 a week short. So increasing the benefits just increases the shortfall they will have because their benefit is capped at £384.61 a week.
Finally, we must call for the benefit level to be increased from 6th April to the poverty level, that is £160.30 a week for a single person, £276.20 for a couple and £85.56 for each child (possibly minus the child benefit rates of £21.05 for the first child and £17.90 for each subsequent child).
* Michael Berwick-Gooding is a Liberal Democrat member in Basingstoke and has held various party positions at local, regional and English Party level. He posts comments as Michael BG.
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38 Comments
What I am looking for now is leadership from our party. A platform for that leadership would be a good start, replacing the not fit for purpose web site.
Michael writes as usual thinking of the most in need.
I agree but would do this in a different and rather more radical way.
Rid us of the distinction of universal credit vs other benefits, by getting rid of universal credit in one go. Abolish the requirement for unemployed to sign on. Raise it to the levels mentioned. Refer t it as a basic income . The same guarantee as employees have. Let all self employed now who lack work get it.
@Lorenzo Cherin – i’m all for helicopter money (the defecit problem is a myth, as Rishi has just proved) but UBI delivered in this way, on an ongoing basis, does nothing for the productivity of the economy. Better would be a jobs guarantee (which would also set a floor for the lowest income).
You may be correct in that Mark, but justice is why ubi is better, equal level of individual, thus social, justice, and nothing stopping employers and govt to encourage work and business.
Lorenzo, I certainly agree with you that the self-employed who now lack work should be given help, as should people made redundant and others seeking work. There should be benefits for them made available speedily, and the levels should be raised, as Michael writes.
But we don’t want a muddle. When you think about it, universal credit is supposed to be a unifying basic income for everyone on benefits, and it was on that basis I take it that we accepted the idea in the Coalition. When you suggest the unemployed should not have to sign on, do you mean for benefits or for employment, Lorenzo?
They need employment, and often benefits as well, and do surely need registering to obtain these goods. It is probable that many people are going to be newly unemployed in the next few months, or only able to work part-time. To guarantee them jobs, part or full-time, could not be done rapidly, and a universal basic income, that highly expensive option not suitable for ending poverty, at best can only be trialled somewhere. But benefits we do have and should provide generously.
Journalist Jenni Russell wrote in The Times last Thursday, ‘A benefits system cruelly structured to discourage claims and encourage work has to be re-engineered within days to give much more generous support to millions who are now forced to be inactive, whether sick or not.’ She is surely right, and we should be pressing the case.
David Becket,
On our website there is a headline – “The Liberal Democrat response to the coronavirus”, which links to an article by Munira Wilson dated March 19th and timed at 11.03. The 19th was Thursday. It hasn’t been updated after Rishi Sunak announcement on Friday. On the economic side it states we have called on the government to:
“guarantee that anyone who is laid off receives at least 20 days of full pay;
“provide full council tax relief for bands A to E for at least six months, with councils fully compensated for this loss of income;
“turn day one universal credit loans into grants immediately;
“take action to ensure no renter is evicted in the coming months as a result of this crisis.”
Lorenzo Cherin,
Do you really think this government could successful introduce a new benefit system within days?
I think we have to work within the existing benefit system rather than scrap it and create another one. (I would like party policy to be the scrapping of Universal Credit, but it isn’t and we didn’t even get a chance in September to try to make it so.) I think the government has abolished the requirement for anyone to visit a Jobcentre. Hopefully this will include abolishing the need to sign on.
Mark Kenyon,
I wish piloting a Job Guarantee scheme was our policy but it isn’t and we didn’t even get a chance in September to try to make it so.
Katharine Pindar,
On Friday, Rishi Sunak announced, he was “suspending the minimum income floor for everyone affected by the economic impacts of coronavirus”. The minimum income floor is applied to self-employed people who have been self-employed for more than 12 months. What this means is instead of taking into account what you actually earn the DWP assumes you earn at least (currently) £287.35 a week (35 hours x £8.21). This means that a single person’s Universal Credit is automatically reduced by £181.03 a week even if they had earned nothing.
Michael, we agree that it is best to work within the existing Benefits system, though its amounts should be increased. However, I have to admit I am stumped by your comment to me. If a single person’s universal credit will be £93.82 a week from April, how can it be reduced by £181.03 a week? I guess I am missing something!
Lorenzo and Mark Kenyon make valid points. There needs to be a minimum income guarantee that anyone eligible for Universal credit without all the rigmaroll and sanctions involved with signing on, attending job centre interviews and commitments to look for work. Equally, there needs to be a jobs guarantee program developed by local authorities and funded by central government to get the millions of unemployed and underemployed back to productive work as soon as the first period of social distancing comes to an end.
The government will not be able to engineer a recovery from recession by money creation and distribution that can only stave off deflation.
The immediate need is for deployment of resources to combat the virus. This means manpower to resource the NHS and Social care, getting the homeless off the streets and into temporary shelters and fast tracking new claims for benefit with the first cash payments being made within a week. Additionally, workers are needed immediately to clean and disinfect public transport and public spaces.
While mortgage holidays and rent deferments have been announced the same should be done with regulated utilities i.e. domestic water supplies, gas and electricity.
With housing and utility costs deferred the basic need if for food and household supplies. This is what benefit payments like sick pay or the Universal credit basic allowance will provide for.
Having taken the necessary action to keep people sustained over the next 12 weeks the government needs to prepare for the economic recovery. This wil require major investment and the roll-out of the job guarantee program across the country to get people back into work. Without this we are looking at a long drawn out economic slump along the lines of that seen in the inter-war years.
Central Banks Unleash Their Unholy Monetary Theology On The People:
That’s a good comment from Katharine, Joe.
Michael, did not realise the unemployed are exempt from job centres, the government have been reading nearly all my articles recently!
Do not think a new system is able or going to be created now, mean the levels ought to be equal.
Want I like is everyone treated with decency.
@John
Money printer go burr.
@ Michael BG,
It’s difficult to know just what to ask for now. Events are unfolding so quickly that what seems like more than enough now will seem inadequate, next week, when it’s likely been provided.
It’s quite remarkable how the world is changing. Governments everywhere are promising to spend billions to defeat the coronavirus and hardly anyone, except maybe John McDonnell and Leyla Moran, is asking where the money is going to come from. They know and have always known. The nonsense about governments having to “put a penny on the standard rate of income tax” to pay for this and that is now exposed as just that and for all to see too!
@ William Francis,
So what do you suggest? 2p on income tax?
This is the most hopeful commentator, with respect to the US, I have seen [first 7/8 minutes] – although the overall implication is – out with the pitch forks!
I’m concerned about food shortages from overseas…I’ve already heard that the Italian Spaghetti harvest (scheduled for April 1st) has been cancelled.
I’m not so concerned about the ‘home grown’ situation as there are now hundreds of thousands of students free. These students ( whose colleges were closed to prevent the spread of the virus) can live in the premises vacated by the overseas workers i.e. 6 to a room..
“What. me worry?”
Michael BG,
You write above “I wish piloting a Job Guarantee scheme was our policy but it isn’t and we didn’t even get a chance in September to try to make it so.” However, not being policy has not stopped LibDem MPs from calling for a universal basic income.
The Government has announced it is pumping almost £7 billion into the welfare system to protect people’s incomes during the coronavirus pandemic
https://metro.co.uk/2020/03/20/rishi-sunak-promises-increase-universal-credit-1000-per-year-12432004/
The Chancellor has said the Universal Credit standard allowance will be increased by £1,000 a year for the next 12 months. He also pledged that working tax credit basic element will be boosted by the same amount; saying ‘Together these measures will benefit over four million of our most vulnerable households.’ (i.e. £4 billion of the £7 billion relates to increases in the basic allowance). The rest of the funds relate to Self-employed workers who will be able to access Universal Credit payments in full, at a rate equivalent to statutory sick pay eligible to employees. And the minimum income floor will be suspended for everyone affected. The safety net will be further strengthened by extra help for renters who may struggle with payments over the coming months. The Government is pledging nearly £1 billion through increasing housing benefits and Universal Credit so the local housing allowance covers at least 30 percent of market rents.
The minimum income guarantee recently discussed on this site proposed an Increase in UC Basic Allowance for a single claimant over 25 to £100 per week i. £1,386 per year (£5,200-£3,814). If the cost is £4 billion for a £1,000 increase in the basic allowance we can extrapolate an approximate cost of £5.5 billion for an increase of £1,386.
The offset of cost savings associated with extending the UC work allowance to a full-time minimum wage level requires a little more modelling. Where a currently unemployed benefit claimant takes up a full-time job guarantee under the minimum income guarantee scheme they will pay 32% of their income of £15,870 (£5078) in tax and NI. (A taxpayer not on Universal credit will pay no tax or national insurance on a full-time minimum wage.)
The effect is that the UC claimant taking up a full-time job guarantee takes home £208 per week net of tax and NI and gets an additional £27 a week in UC basic allowance on top. However, he or she is effectively paying for the basic allowance through their tax and NI contributions from their earnings. This is what putting people in work through job guarantees does for reducing pressure on the benefits system and for moving people out of the poverty trap. So long as the jobs are providing skills training or useful public services everyone is a winner – the claimant, the taxpayer, the public receiving the benefit of improved services and the economic health of the country that comes with a full-employment policy.
Katharine,
I was talking of earnings. I was trying to explain how the minimum income floor worked. Perhaps setting out the system works for an employed person would help. Let us assume if they were not working they would be entitled to £115.13 a week. Let us assume they have no children and there is no work allowance for them. If they then earn £120 in a week then their benefit of £115.13 would be reduced by £75.60 (earnings £120 x taper 0.63) leaving them with £39.53 on top of their earnings. If they were self-employed and the minimum income floor was applied it would be assumed they had earned £287.35 and they would receive no benefit. If these people also had rent to pay of £302.33 a week, then the one employed earning £120 a week would receive £341.86 and the self-employed person with the minimum income floor applied would receive £236.43.
Joe Bourke,
Do you really think this government could successful introduce a new benefit system within days?
I think it is better to use the existing system once the benefit cap has been abolished and the waiting time reduced from five weeks to 5 days. These could be done tomorrow, setting up a new system can’t.
I agree that the government should be providing assistance for people to do the roles which we need more people doing, working in the NHS, in the care industry, and in the distribution system. And ensuring those who want to volunteer to help people can do so. Plus providing homes for the homeless.
As businesses were laying people off because of the Coronavirus and government’s advice this should only be temporary. If these businesses were allowed to trade normally they would re-employ their laid off workers. Therefore it is important to ensure aggregate demand is keep near to the level of last month. This is why the 80% of wages for employees is important plus money for the self-employed and more money for those trying to manage on benefits. I don’t see any more need for a Job Guarantee scheme after the Coronavirus is defeated than last year. And last year I thought there should be a pilot of Job Guarantees in the North East region of England.
Lorenzo Cherin,
I think the self-employed should be treated the same as employees with the government paying 80% of the average earnings over the last year.
Peter Martin,
We can hope that after this crisis there will be a recognition by everyone that governments can borrow and/or print large amounts of money to solve the problems in the economy.
Joe Bourke,
Indeed, it seems odd that most of our MPs are calling for a UBI. Perhaps some of them don’t understand the difference between a minimum income guarantee which we want to pilot and a UBI!
Rishi Sunak said he was helping about 4 million households with the increase in Universal Credit and Working Tax Credit of a £1000 a year (4 million x £1000 = £4 billion). There are between 7 and 8 million households on benefits (these includes the legacy benefits which Rishi Sunak is not increasing), so assuming there are 7.5 million households on all benefit an increase of £1386 is £1386 x 7.5 million = £10.395 billion. As I informed you last night!
A claimant of Universal Credit who has no children and isn’t in the limited capability for work group earning £15,870 would currently lose all of their benefit of £5,200 (up to £9998.10 if they were receiving that much) and pay £1285.52 in NI and Income Tax (from April) leaving them with just £14,584.48. Under your system I think you are saying they would have £10,791.60 in earnings and £5200 in benefits making £15991.60, an extra cost of £1407.12 on the current system and a huge cost for a Guaranteed Job of £10,791.60 assuming they received £5200 in benefits. Therefore one million people on your Guaranteed Job scheme would cost £10.79 billion plus the admin costs. My own scheme would cost less perhaps less than half depending on a person’s travelling costs (£2600 plus travelling costs for each person on the scheme).
I will post a comment on your comments on the other thread (https://www.libdemvoice.org/jane-dodds-writes-why-ubi-is-the-only-way-forward-63763.html) including on the details of your Minimum Income Guarantee hopefully tomorrow.
Michael BG,
the benefit system for the minimum income guarantee is already in place. As has been seen, the basic allowance and work allowance can be increased at a stroke of a pen.
This is DWP statistical summary at August 2019 for benefit claimants https://www.gov.uk/government/publications/dwp-benefits-statistics-august-2019/dwp-benefits-statistical-summary-august-2019
There were 20 million people claiming DWP benefits at February 2019. Two thirds of benefit claimants are of State Pension age (13 million). The are 7 million under pension age. This is people not households. The number of households eligible for UC or Working tax credit basic allowance is circa 4m as per the Chancellors statement. You are confusing number of people with number of households.
Of the 2.3 million people on UC, in July 2019:
760,000 (33%) UC claimants are in employment
930,000 (42%) are in the ‘Searching for Work’ conditionality regime
490,000 are in the ‘No Work Requirements’ conditionality regime
This gives you and indication of the numbers of working age claimants in employment or ‘Searching for Work i.e 75% of 7m working age claimants that may have recently lost a job or would like to work if offered a job.
The job guarantee scheme is largely self-financing in a recession. It is part of the fiscal stimulus that is introduced and in a recession generates the fiscal multipliers that are needed to allow the private sector to begin hiring again. As we return to normal times, the job guarantee acts as an automatic stabiliser and the numbers begin to fall as the private sector steps up hiring. This is the key advantage over benefits which are hard to reduce when the stimulus has to be withdrawn. This was seen in the 1980s when millions spent the rest of their lives unemployed and on benefits. The difference now is there is no North Sea Oil bonanza to do what Margaret Thatcher did. even if you wanted to repeat the same mistakes.
12 weeks is more than enough time for local authorities to put job guarantee schemes in place as social distancing begins to be relaxed in the summer. New Deal type programs have historically been done quickly and when there are large manpower shortages across all public services, It is not an overly demanding task to place people. Many of the most deprived communities have the greatest need even before this public health crisis. It will pay immediate dividends in enabling a much faster economic recovery.
And never forget to mobilize industrial resources and capacity to manufacture essential medical supplies and related equipment (drugs, masks, ventilators, test kits, PPEs…).
@ Michael BG,
“We can hope that after this crisis there will be a recognition by everyone that governments can borrow and/or print large amounts of money to solve the problems in the economy.”
I wouldn’t quite put it like that!
Some of the fringe proponents of MMT do often express themselves in this way and it brings the theory into disrepute.
The correct way to put is to say that fiscal measures are an essential macroeconomic tool. Currency issuing governments aren’t constrained in their spending by taxation revenue received but they are constrained by the available resources in the economy. Therefore they are required to balance the economy as a whole rather than balancing expenditure and revenue. Usually it is safe for expenditure to be greater than revenue but there are circumstances, such as when the economy is overheating and inflation is a potential problem, when it isn’t.
When the financial crisis hit pundits took to quoting Richard Nixon ‘We are all Keynesians now” https://www.theguardian.com/commentisfree/2008/jan/25/wereallkeynesiansagain
Economies all around the world deployed large scale monetary and fiscal stimulus particularly China with a very large stimulus package relative to GDP.
Stimulus, however, is just to stop the slide into depression and put the economy back onto a path of recovery and potential growth. The danger lies in becoming like Japan where the overhang of private and corporate debt and bankrupt companies kept on life support with ultra-low credit has stalled growth for most of the last 3 decades.
When the econmy is in the recovery phase, deficit spending needs to be managed over the business cycle not only with regard to potential inflationary consequences, but also to ensure efficiency and value for money in both current spending and investment spending (including debt service costs). Confidence in financial markets needs to be maintained. The fiscal headroom for dealing with future shocks and downturns needs to be considered in the light of bond yields on gilts and allowance made for increasing demands on the working population to provide healthcare services and pensions for a rapidly growing number of retirees.
You can maintain a robust welfare system in a full-employment economy that is capableof steady growth. it is much more difficult in a stagnant economy as Japan has experienced. Building an economic recovery on solid foundations of public investment and structural reforms rather than reinflating stock market and house price bubbles will be all the more important this time around.
Joe Bourke,
The number of claimants equals the number of households because claims are assessed per household.
The link you provide states:
“At February 2019 there were 6.8 million Working Age claimants”.
I couldn’t see a figure for Universal Credit in your link.
There were 2.8 people claiming Universal Credit in January 2020 (https://www.gov.uk/government/publications/universal-credit-29-april-2013-to-9-january-2020/universal-credit-29-april-2013-to-9-january-2020).
The link you provide is only providing DWP figures. Tax Credits for working aged people are not included as they are dealt with by HMRC.
According to HMRC (https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/821693/CWTC_Commentary_April_2019.pdf) at 2nd April 2019 there were 3.1 million families claiming Child Tax Credit and/or Working Tax Credit. An estimate of 1.2 million for those receiving the basic element which is the part being increased by £1,000 a year [(2.8 +1.2 million) x £1000 = 4 billion] is likely to be correct. Those on the other legacy benefits are not getting the extra £1000.
If we add both figures 6.8 and 1.2 we get Katharine’s 8 million.
I accept that a Job Guarantee can act as an automatic stabiliser, in that it costs more in a recession than when the economy is running with an unemployment rate of less than 5%. However, it is never self-financing.
You haven’t addressed my point that if the government increases benefit levels as I suggest and pay 80% of previous earnings to the self-employed aggregate demand will not fall as much as it would have without these and the announced grants. This will mean that once the Coronavirus crisis has passed there should not be a much larger pool of unemployed people than there was in February.
You assert it will be easy to set up Job Guarantee schemes across the whole country. I am not convinced and so would like the North East to be the pilot area as it is the region with the highest unemployment rate.
Peter Martin,
I don’t disagree with your qualification and I did not intend to imply that the government didn’t have to work within constraints – what the economy can cope with.
Michael BG,
The UC statistical bulletin you link to does state there were 2.8 people claiming Universal Credit in January 2020. A short distance down the page it shows there were 2.3 million households on Universal Credit. The report gives figures for the numbers of people and numbers of households.
A two-person household does not get two basic allowances. A single person household 25 or over gets £317.82 per month. A couple where either of you are 25 or over get £498.89 (for you both) i.e a little over1.5 times the single amount. Both are being increased by £83.33 for the next year.
The basic allowance applies to UC and Working tax credit claimants. Under UC, If you are not earning at least the equivalent of 35 hours at the minimum hourly wage you will be expected to look for better-paid work (depending on your ability to work and any caring commitments you have).
There are four million households entitled to a UC standard allowance or the working tax basic element. In most cases, a single individual taking up a job guarantee will come off of benefits and will receive a tax and NI allowance instead and this reduces the level of basic allowances to be paid through benefits.
Aggregate demand has already fallen and will fall further in the next quarter when we will most likely be in a two-quarter technical recession. London and the Southeast may be able to bounce back relatively quickly when the recession is over but without serious investment and public job support the rest of the country will not, any more than it did in the Thatcher years or after the financial crisis.
Joe Bourke,
Thank you for pointing out my mistake. 2.3 million on Universal Credit and therefore 1.7 million on Tax Credits are figures which fit better with the figures I remember from the past and I thought 1.2 million for Tax Credits too low. I am glad we now agree that there are 4 million on only these two benefits and not all benefits.
From all my post on benefits I don’t understand why you would think I don’t know the current Universal Credit rates. I think the £83.33 a month increase is from now and not for next year (starting in April). It has been announced that the new rates from April were going to be £323.22 and £507.37. I expect the £83.33 to be added to these figures rather than them being revised and the 1.7% increase applied to £401.15 and £582.22.
We have no idea how much aggregate demand has fallen and will fall over the coming months. However, it is likely that production has fallen more. It is government advice and future regulations which is driving the reduction in production and reducing sales. You are likely to be right and the economy will reduce in size both this quarter and next. If by June the government is allowing manufacturers to manufacture and all shops to be open then demand should return to what it should have been for this quarter in the third quarter. I think you are thinking this is like previous recessions and this one is not like any previous recession.
Michael BG,
optimism is good at the individual level but at the government level it can stray into denial. The best leaders make a virtue of paranoia and prepare for the worst hile executing plans for a better outcome. We can get an idea as to how much aggregate demand has fallen and will fall over the coming months by looking at the experience of China since the beginning of the year. Nouriel Roubini, an economic professor and advisor to the Clinton administration https://www.theguardian.com/business/2020/mar/25/coronavirus-pandemic-has-delivered-the-fastest-deepest-economic-shock-in-history, writes in the Guardian:
“… every component of aggregate demand – consumption, capital spending, exports – is in unprecedented freefall. While most self-serving commentators have been anticipating a V-shaped downturn – with output falling sharply for one quarter and then rapidly recovering the next – it should now be clear that the Covid-19 crisis is something else entirely. The contraction that is now under way looks to be neither V- nor U- nor L-shaped (a sharp downturn followed by stagnation). Rather, it looks like an I: a vertical line representing financial markets and the real economy plummeting.”
“… governments need to deploy massive fiscal stimulus, including through “helicopter drops” of direct cash disbursements to households. Given the size of the economic shock, fiscal deficits in advanced economies will need to increase from 2-3% of GDP to about 10% or more. Only central governments have balance sheets large and strong enough to prevent the private sector’s collapse.”
“…the fiscal response could hit a wall if the monetisation of massive deficits starts to produce high inflation, especially if a series of virus-related negative supply shocks reduces potential growth. And many countries simply cannot undertake such borrowing in their own currency. Who will bail out governments, corporations, banks, and households in emerging markets?”
In that kind of situation, where money loses its utility as a medium of exchange, economic levers have to be supplanted with measures like rationing and price, rent and wage controls i.e. wartime levels of controls over real resources.
Joe Bourke,
I was looking at the UK economy and while I haven’t calculated or found a cost to the government of the Coronavirus changes not including loans and deferred payments. I think it is over 5% of GDP. I think the stimulus in the USA seems to be 10% of the economy. Therefore if all the major economies take similar measures world aggregate demand should hold up and hopefully come back to near its January 2020 level once the restrictions on the world’s production is lifted. Have you seen any estimates to how large the reduction in aggregate demand in the UK is likely to be in June and July?
It seems that in the USA the unemployed will receive an extra $600 a week for four months, which is nearly two-thirds of the median full-time weekly wage!
Last Friday before Rishi Sunak made his announcement Ed Davey wrote to him calling on him increase Statutory Sick Pay to £220 a week and the standard benefit level to £150 a week for a single person and £260 for a couple (https://twitter.com/EdwardJDavey/status/1241016452800491522).
While it wasn’t the £160.30 and £276.20 which I would like to see, it was over the Joseph Rowntree Foundation poverty line in 2016/17 of £148 for a single person and £255 for a couple. (If these rates were increased by the annual increase in benefits (1.7%) coming into force in April they would be £150.52 for a single person and £259.34 for a couple.)
Michael BG,
this is the early estimates for China https://www.cnbc.com/2020/03/24/china-beige-book-q1-contraction-in-chinas-economy-from-coronavirus.html
“An early look at Chinese business conditions in March shows little indication the economy has recovered much from the shock of the coronavirus in the first two months of the year.”
“Crucially the results continued to deteriorate into mid-March when most firms were re-opening and supposedly ‘back to work,’” the report said. “Nationally, our revenue index plunged to -26 this quarter while profits dove in tandem, to -22.”
“it’s “not unreasonable” that gross domestic product will contract 10% to 11% in the first quarter, even with a slight upturn in the last few weeks of this month.”
In the UK the purchasing managers index gives an early indication https://www.ft.com/content/61989bfa-6db6-11ea-89df-41bea055720b
The IHS Markit flash UK purchasing managers’ composite index — an average across the manufacturing and services sectors — fell to 37.1 in March, the lowest level recorded since the survey began in July 1996, and a sharp drop from 53 in February. Any reading below 50 indicates a majority of businesses recorded a contraction in activity.
“A recession of a scale we have not seen in modern history is looking increasingly likely.”
Joe Bourke,
Has the assistance given to businesses and people by the Chinese government been as good as that provided by our government? From the little I have seen I expect not. A reduction of the Chinese economy of 11% would mean that ours would be reduced by less.
Even in the CNBC article, there is some optimism, “the China Beige Book’s first quarter … analysis noted that the survey results on employment weren’t as bad as expected, especially for small- and medium-sized companies. The report pointed out that the situation could go either way: a “solid reversal” in the second quarter, or a need for much greater government intervention.”
Over the last week in the US the rate on unemployment seems to have increased by 2%, while I think in the UK this figure is about 1.25% The raw data from other countries is only useful if we know what they have done to keep their economy going. It appear we are the doing the most and therefore we are likely to be least effected. Of course we will be effected by a world recession but that is only one factor to consider among many of others.
Michael BG,
this crisis is going to have a major negative impact on the UK economy with unemployment returning to the levels we saw in the wake of the 2008 financial crisis https://www.theguardian.com/business/2020/mar/30/coronavirus-forecast-to-cut-uk-economic-output-by-15
“The coronavirus pandemic could cause UK economic output to plunge by an unprecedented 15% in the second quarter of the year and unemployment to more than double.”
“The deepest recession since the financial crisis is now all but unavoidable”
The [CEBR] said “it expected the economy to have shrunk marginally in the first three months of the year by 0.5%, followed by the steepest economic contraction since comparable records began more than 20 years ago.”
“Japan’s Nomura bank has pencilled in a slightly less precipitous fall for the UK of 13.5%, but also predicted a significant rise in unemployment. The bank’s analysts forecast that government initiatives designed to persuade employers not to let staff go will not be enough to stop the figure more than doubling from 3.9% to 8% between April to June, before creeping up to 8.5% in the third quarter.”
Joe Bourke,
We should expect the economy to take a hit. The UK population is about 66.4 million of which about 12.6 million are children and 12.2 million are 65 or older. There were about 33 million people working in the UK in January. About 5.4 million people work in the public sector. The UK’s food and grocery industry employs 3.9 million people. If we ignore everyone except those in work or aged 65 or older we get 45.6. If we take that as 100% we can remove the 12.6 million aged 65 or older, the 3.9 working in food and grocery industry and the 5.4 working in public sector. This leaves 23.7 million people who could be receiving only 80% of their normal earnings. 23.7 / 45.6 x 100 = 51.97%, let’s call it 52%.
If we look at aggregate demand, the first quarter we can assume the hit is only in March and its maximum extent will be 1/12 of 52% of 20% making 0.867%. If we assume the economy was going to grow by 0.467% we can predict a reduction of 0.4%.
If we assume what is happening now continues in April, May and June we should be looking at 1/4 of 52% of 20% makes 2.6% if we take away the predicted growth of 0.467% we get a 2.133% reduction in the second quarter. We might want to add to this a figure for the 5 million self-employed, say a further fall of 50% we could add 5/45.6 x ¼ x ½ x 100 = 1.37%. This still only takes us to 3.5%.
Of course output will take a larger hit especially in the second quarter. It can’t be 25% of GDP; it has to be less. If the government has closed down half of businesses then this will be 12.5%. 15% seems to assume that three fifths of the economy has been shut down. Therefore the CEBR forecast could be correct.
My concern is what inflation might leap to in the third quarter if the economy get back to normal in July. If aggregate demand only falls by 3.5% but output falls by 15% there will be 11.5% of GDP latent demand. The government needs to consider introducing price controls for when the coronavirus crisis is over. Perhaps limiting price rises to 5% unless the cost price has gone up by more will be required.
Michael BG,
Aggregate demand is measured as either the total spending on goods and services at a given price in a given time period or the total output of goods and services at market prices in a given period. It cannot exceed domestic output produced for consumption, investment and export less imports as this is one of the ways of measuring aggregate demand. You cannot put price controls on imports of food and other essential commodities.It is equally difficult to have price controls in a services-based economy as both Ted Heath and Harold Wilson discovered. Capital controls and impot tariffs might be mooted but then we are back to the ‘beggar my neighbour’ policies of the 1930s depression era.
At the microeconomic level we can use ‘demand’, which is the quantity of a good that customers are willing and able to purchase at a given price in a given time period. But here we are talking about one single company or a market, not the aggregate of goods and services across the country as a whole. When we talk about aggregate demand we are referring to demand in the macroeconomic sense. Aggregate demand is the total spending on goods and services at a given price in a given time period i.e GDP or total output.
The price of imports will almost certainly rise as the pound has weakened significantly against the dollar but this is offset to a large extent by the precipitous fall in the price of oil at present. But the oil price fall may be temporary.
Many smaller firms will not furlough workers for any length of time when the 3-month subsidy ends. They will be unable to pay the 20% top-up of staff wages and we are likely to see a rapid increase in unemployment. We need to be pushing for job guarantees to come into effect as soon as the lockdown period is lifted and accelerated investment to support a fast rebuilding of private sector activity.
Joe Bourke,
Aggregate demand is total demand in the economy, I agree this demand can’t be measured unless it becomes a purchase; of course it can be larger than output. When this happens inflation occurs. I am surprised you don’t know this.
I wasn’t thinking of putting price controls on exports or imports, which was why I included the phrase where costs prices had gone up, as this would include where the materials needed to produce something went up and some of these materials will have been imported. (Capital controls is a separate question and were once economic orthodoxy c. 1950’s, 60’s and 70’s.)
There is no requirement for any companies to pay the 20% not covered by the government. As my figure assumes no companies are topping-up to 100% of wages they are pessimistic.
The question that needs answering is where were those nearly 1 million people claiming Universal Credit in the last couple of weeks working in early March and why are they claiming Universal Credit? Some will be the self-employed whose businesses have collapsed because of the government advice and orders and some will be zero-hour contract workers. It is possible once those businesses which have been advised or ordered to close re-start the latent demand will return for their products and services and all these people will return to doing what they were doing in early March.
The size of this latent demand should be of concern and it could lead to huge inflation and the last thing we need is for the government to add to aggregate demand by having a huge economic stimulus. There might be a limiting factor on how much the economy can jump back in one quarter and the government needs to consider if such a limitation exists before stimulating the economy.
Michael BG,
aggregate demand has a precise definition and measurement https://www.investopedia.com/terms/a/aggregatedemand.asp
“Aggregate demand is equal to GDP as the price level adjusts because the two metrics are calculated in the same way. GDP represents the total amount of goods and services produced in an economy while aggregate demand is the demand or desire for those goods. As a result of the same calculation methods, the aggregate demand and GDP increase or decrease together”
In Keynesian economics effective demand refers to the willingness and ability of consumers to purchase goods at different prices. It shows the amount of goods that consumers are actually buying – supported by their ability to pay.
Effective demand excludes latent demand – where the willingness to purchase goods may be limited by the inability to afford it. In Keynesian theory, effective demand is the point of equilibrium where aggregate demand = aggregate supply. Effective demand may be insufficient in the short-run to achieve full employment due to unemployed workers without income to produce unsold goods.
Government support to firms to retain workers and the self-employed is aimed at maintaining the capacity to supply goods and services, albeit at a lower level than previously, as people are able to return to work. Incomes are falling as many firms will not be able to pay the 20% top-up to maintain wages and aggregate demand will fall with lower aggregate supply as the price level adjusts to a new equlibrium. Hence the level of effective demand will be significantly lower. To increase effective demand requires new deal type investment programs to increase both supply capacity and employment at the same time. Inflation won’t arise as a consequence of employing idle productive resources in the economy; it comes about as a consequence of increasing money supply/spending in the economy without increasing the domestic supply of goods and services coupled with the effect of a depreciating currency (or tariffs) on the price of imports.
Joe Bourke,
Here are some more quotations from the page you provided the link to:
“Technically speaking, aggregate demand only equals GDP in the long run after adjusting for the price level.
“Keynes, by arguing that demand drives supply, placed total demand in the driver’s seat. Keynesian macroeconomics have since believed that stimulating aggregate demand will increase real future output.” This means that the demand is in the economy first and output is increased to meet it.
Another quotation from the same source, ‘Demand-pull inflation is the upward pressure on prices that follows a shortage in supply. Economists describe it as “too many dollars chasing too few goods”’ (https://www.investopedia.com/terms/d/demandpullinflation.asp)
Did you understand the figures? A 15% reduction in output in the second quarter and a reduction in the amount of money consumers will have is only 3.5% and I think this is an over-estimate. This means there will be 11.5% of what I called “latent demand” but maybe would be better described as “deferred demand”. I do not consider that the economy will be in “equilibrium” in this quarter, or the next one or even in the third quarter. Would it help your understanding if I provided some numbers in my Keynesian calculation of National Income (which I have used in the past and shown not in being in equilibrium)?
In the second quarter I hope that the demand for goods in the economy will equal the supply of goods and consumers will be happy to defer the spending of all of their income. In the third quarter I hope that production will return to the pre-crisis levels, because as you say the government took action to try to keep the production capacity. If my forecast for the deferred demand is correct at 11.5% of GDP then inflation will be a problem if consumers try to satisfy their deferred demand all in the third quarter. We disagreed in December on how much the economy could grow in 2020, but even if my higher estimate of the spare capacity in the economy of 1.6% is correct it is not enough to meet the deferred demand.
Do you think that the deferred demand which I estimate at 11.5% of the GDP will not become real demand in the third quarter? And if so why?
Michael BG,
you ask “do you think that the deferred demand which I estimate at 11.5% of the GDP will not become real demand in the third quarter? ” No, I don think so. I am dealing with small firms that are folding now, despite government support, as are accountants all over the country https://www.bbc.co.uk/news/business-52114414 “up to a fifth of businesses could close if the lockdown lasts a month or more.” That level of disruption to employment will take a long-time to recover from.
The CEBR forecast of a steep economic contraction of 15% and a doubling of unemployment is likely a realistic assessment. It is in line with Nomura’s estimate of a 13.5% fall in GDP with a rise in unemployment to 8% this quarter, before creeping up to 8.5% in the third quarter.
Whether unemployment stabilises at that level this winter is to some extent dependent on whether we experience a second wave (as happened with the Spanish Flu). When both aggregate demand and aggregate supply fall together (as incomes decline and firms pack-up business and employment) effective demand is lowered and requires targeted investment over the long-term to support an economic recovery over a number of years.
Joe Bourke,
The government help is meant to ensure that businesses do not fold because of Coronavirus. On Friday Rishi Sunak took action to try to get the money out to businesses (https://www.gov.uk/government/news/chancellor-strengthens-support-on-offer-for-business-as-first-government-backed-loans-reach-firms-in-need).
The issue is not what unemployment will rise to but if the jobs these people were doing will be there when the lockdown is over. I do think that the government understands this and is trying to take action to ensure most of the jobs will be there. At this stage we just don’t know how many jobs will be permanently lost. I expect we will know more over the next couple of months. It is possible that my prediction of 11.5% of deferred demand is too high. However, it the Coronavirus crisis continues into the third quarter which it seems some are now predicting there could be a further 11.5% of demand which will need to be deferred.
Even if unemployment rose by two million there would still be deferred demand. If unemployed rose to 10% there would be deferred demand of about 5.5% plus any which might arise in the third quarter. My concern is how quickly output can be increased to meet this demand when it is no longer deferred and if on top of this demand the government created even more would businesses be able to respond quickly enough to stop there being a demand-pull rise in inflation. As you normally take a conservative view of how much the economy can grow by I am surprised that you now seem to think that if demand was increased by over 6% businesses would be able to meet this demand in one quarter.
I think it should be party policy to support a Job Guarantee in principle and for us to say we would set up a large pilot (hopefully in the region with the highest unemployment rate, currently North East England). However, if we call for a national scheme to be set up now I think this Conservative government would set up a compulsory Workfare scheme and call it a Job Guarantee scheme.
Michael BG,
government support is welcome to prevent a complete economic meltdown. However, many hospitality firms like Carlucciosand high street firms like Brighhouse are already struggling with business rates and online competition will not make it through. Those firms that do come through this year will be carrying an increased debt burden for years to come.
Robert Skidelsky, the Keynesian economist https://www.prospectmagazine.co.uk/magazine/keynes-in-the-age-of-coronavirus-economy-recession-covid-19 writes of excess demand:
“Inflation would hit the low-paid particularly hard. The solution was to raise the standard rate of income tax to 50 per cent, with a top marginal rate of 97.5 per cent, and lower the threshold for paying taxes.”
With the UK facing a global slowdown in trade and Brexit at the same time as the domestic impact of this pandemic on firms and their workers there are no easy solutions and no certainty that inflation rather than deflation will be the problem. But then again there never are easy solutions or certainty as Keynes was at pains to point out.
If demand in the form of excess money supply outstrips the capacity of the economy to meet that demand, Interest rates cannot be increased to control inflation as this would put many indebted firms out of business and homeowners in financial distress. Cuts in spending on public services are not politically viable; so that just leaves tax increases as has already been forewarned for self-employed national insurance. Even this would not address imported inflation. There would a double whammy of high levels of tax coupled with high inflation and unemployment i.e, stagflation.
If high inflation is avoided and debt deflation sets in we can look to the experience of Japan over the past three decades to know what to expect.
The job guarantee is a national program administered by all local authorities as needed. There are labour shortages right now in hospitals, social care, delivery of food and other goods purchases online, not to mention bring in the harvest after all the east european farmworkers have gone home. A compulsory Workfare scheme was Ed Balls plan for controlling spending on benefits https://www.theguardian.com/politics/2013/jan/04/ed-balls-welfare-work-scheme.
Joe Bourke,
That was a good article by Robert Skidelsky. He states, “In practice, two processes are underway today. Firms are being asked to switch production from consumer goods to “ammunition” like ventilators, in an eerie echo of wartime logic. Much more important are the steps being taken to keep up aggregate demand by paying workers for not working. Although so far the government has only promised guaranteed loans to businesses, it is inexorably being driven to paying wages directly as in the United States. With production falling, this is the path to the shortage, or excess demand, economy: fewer goods to buy but just as much money to buy them.
“There are already signs of excess demand in certain retail sectors due to panic buying and interruption of wholesale supply chains.”
Do you agree with Robert Skidelsky and me now?
A radical approach would be compulsory purchase of Coronavirus bonds, being done as an extra tax, maybe at between 10 and 15% on incomes above the 80% of medium earnings (80% of £585 x 52 [https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/bulletins/annualsurveyofhoursandearnings/2019] = £24,336). Then once the economy is back to normal people would be able to sell their bonds back to the government in a controlled way to turn this deferred demand into real demand at a level the economy can cope with.
There is no agreed way of delivering a Job Guarantee scheme. As can be seen by the Ed Balls newspaper story, it is so easy for a Job Guarantee scheme to be marketed as compulsory. The aim of a Job Guarantee scheme should not be to do the jobs which are difficult to fill, but be person centred with people keeping their existing skills by using them or providing work experience in a new role where they could be employed once they have the experience.