Why is UK struggling more than France or Germany?
Shoppers are “treating themselves”, indulging in “revenge spending” and enjoying a post-lockdown “splurge”. You can maybe understand why shops are keen to promote this sort of narrative with their doors having been shut for so long. And a revival in economic activity is obviously welcome, particularly for people whose jobs are resting on it.
But such spending is not an option for everyone. There’ll be no such retail therapy for those at the sharp end of the economic crisis wrought by the pandemic, unless they indulge in “revenge borrowing” and put themselves on the road to hell by so doing. The Resolution Foundation has published an intriguing piece of research comparing the impact on the finances of people in France, Germany and the UK. The report, After Shocks, argues that typical household incomes across all three countries are closely aligned. In the year
before the pandemic it gives figures of €33,800 (£28,450) for France, €33,900 for the UK and €34,400 for Germany. But those averages mask some big differences between the three. The UK, for example, suffers from far higher levels of inequality than do the other two, such that the poorest households had incomes 20 per cent lower than those in France. The social security and private savings safety nets are, meanwhile, far weaker here than in either of the comparator countries. UK households involved in the study were just as likely to have experienced a “negative employment change” as their French counterparts (38 and 39 per cent of households in work in February 2020 compared to 27 per cent in Germany). But they endured a far greater hit to their living standards than those in the other two.
Among households in which at least one person fell out of work, 41 per cent of UK households suffered a severe income fall (of at least 25 per cent), twice the level in France (20 per cent) and significantly higher than in Germany (28 per cent). One-in-three (33 per cent) UK households duly cut back their spending – a far higher proportion than in France (23 per cent) and Germany (21 per cent). They were also more likely to have struggled to meet housing costs (50 per cent vs 43 per cent in France vs 44 per cent in Germany) and were twice as likely to have taken on more debt (17 per cent vs 9 per cent in Germany vs 8 per cent in France).
The UK’s longer, and tougher, lockdown helps to explain the figures and the encouraging sign is, with its vaccine programme ahead of the others, and reopening proceeding apace, it may enjoy a quicker bounce back. But the report also argues that UK households are much less resilient than their continental counterparts, with lower rates of saving and a weaker social safety net to protect them.
The furlough scheme has clearly helped to mitigate the situation, putting a lid on unemployment, the peak of which may now be lower than had been feared. Yesterday’s release of the official figures for February were mixed. The rate of joblessness unexpectedly dipped a bit – to 4.9 per cent from 5 per cent. But 5 million people were still on furlough (which brings with it an income haircut) and there were more than 800,000 fewer employees than before the pandemic struck. Under-35s have been hit hardest, and it isn’t even close. Back to the issue of safety nets: the report says there is an urgent need for the gaps in the UK’s to be plugged and the resilience of UK households to be boosted before the next crisis rolls in.
There was a welcome sign this week that at least part of the Conservative Party recognises that action is needed. Two groups of Tory MPs (the Tory Reform Group and One Nation caucus) called on Boris Johnson to keep the £20 universal credit uplift in place, amid fears that the Treasury’s plan to remove it in September could deliver a devastating blow to millions of people. That would represent a good start, although more work is clearly required when it comes to the ability of UK households to weather economic storms.
The flip side of the inequality highlighted in the report means that there are obviously a lot of people who will have weathered the storm more comfortably, and built up their savings. These are the people now indulging in all that “revenge spending”. Once the recovery has been established, perhaps it’s time to deploy the taxation system to – dare it, say it – level things up a bit by further closing the gaps in the safety net. There’s clearly room to do so. Whether even the relatively liberal Tories calling for a permanent boost to universal credit would recognise that is an open question.
There was a welcome sign this week that at least part of the Conservative Party recognises that action is needed