Spending Review 2020: From health crisis to economic emergency

This week Chancellor Rishi Sunak announced the government’s plans for spending for the next year alongside the latest OBR forecasts. We look at what the Spending Review 2020 means for low income families, and the organisations that support them.

A Covid-19 driven economic emergency

The backdrop to the spending plans is a deeper and longer lasting economic impact than had been hoped for at the start of the Covid-19 crisis, as outlined in the OBR forecast. We learned that:

• The economy has retracted by 11.3% to date
• It’s projected that it will not return to pre-crisis levels until the last quarter of 2022
• Public borrowing is expected to rise to £394bn this year
• The number of unemployed people is set to rise to 2.6m at the peak in the second quarter of 2021
• Average pay will contract by the equivalent of £1,200 per person and will not reach pre-covid levels for a few years

Given the unprecedented gloomy economic forecast, additional support for low-income households beyond the measures introduced at the start of the crisis was not expected. However, many of the frontline organisations working with households on low-income hoped for clarity over the ongoing retention, into 2021, of the benefit uplift introduced at the start of the crisis and further funding for councils as they support their residents. Neither of these were forthcoming.

Families on low incomes saw some reasons to be cheerful

Despite the bad news about the economy there was some good news for low-income families. People earning under £24,000 were exempt from the public-sector pay freeze and the National Minimum Wage was extended to those aged 23 and 24. Sunak also announced a £3 billion support package to help those who have been unemployed for over a year to find work and £670 million to councils to support low-income Council Tax payers. At this stage, we don’t know how this additional funding for Council Tax support will be distributed nor how councils will be expected to use these funds. Nevertheless, all these measures are welcome.

The real value of the National Minimum Wage increase

Even so, the Spending Review 2020 did nothing to address the nationwide concern around child poverty. Given that 70% of children living in poverty are in a working household, a real boost to the National Minimum Wage would have benefitted poorer families.

Pre-covid this was expected to rise to £9.21 an hour from next April yet the rise announced in the Spending Review 2020 is considerably less; an increase of 18p an hour to £8.91 an hour. This equates to a monthly increase of £19.59 after tax for those working full time and aged over 25. For those aged 23 and 24 the increase is greater at £73.22. Due to the tapering away of benefit, workers who rely on Universal Credit to support their income, such as tenants, who work 35 hours at the minimum wage, will see a rise of just £7.25 a month.

No clarity given about benefits from April 2021

Given that unemployment is predicted to rise to 7.5% of the working population, it was particularly disappointing that there was no commitment to continue the widely welcomed benefit increases introduced at the start of the pandemic into 20021, namely;

• The £20 a week uplift in Universal Credit and Working Tax Credits
• The suspension of the Minimum Income Floor, a notional income used in the assessment of benefit support for the self-employed

The OBR release did confirm that the Covid-19 response measure introduced in April to increase support for tenants will remain but will be frozen from 2021/22. This sets support for private rents at the level of the 30th percentile of local rents. The retention of this measure into next year will be a relief to private renters but the impact of another benefit freeze will not be known until the trajectory of rents, in the light of both Covid and Brexit, is understood.

Previous analysis by Policy in Practice showed that taken together, these measures increased the average take home income of households in receipt of Universal Credit by over £90 a month. The measures meant that 6% of households who previously could not meet their outgoings were now able to do. Removal of these measures in April 2021 will have a major impact on households already struggling.

The lack of clarity around the extension of the £20 a week benefit uplift and the suspension of the Minimum Income Floor also causes huge issues for those organisations we work with who provide frontline support to low-income households.

The uplift in the personal allowance was not extended to most legacy benefits which means that Universal Credit may be more generous than the benefit it replaces. Welfare advisors need clarity in order to advise claimants currently in receipt of legacy benefits whether they should move to Universal Credit.

Policy in Practice has previously explored some of the situations where personal advice is needed in order to help claimants decide between the benefits system and where short-term gain needs to be balanced against longer-term impact.

A striking example of this need for individual personalised support is the level of support options available to self-employed households. These households may be better off moving from legacy benefits to Universal Credit in the short-term but will be worse off if the Minimum Income Floor is introduced in April. Without clarity on the future of these measures, welfare advisors must set out the options for households to make informed decisions.

Example: This household receives £1,063 on legacy benefits but would receive the higher £1,164 if they moved to UC. However, this will drop to £526 if the MIF is re-introduced in April 2021

Councils need to target their support where it is most needed

The Spending Review 2020 also outlined welcome additional funding to councils. This included £1.55 billion for additional Covid expenditure, £762 million to cover uncollected council tax payments, and a further £670 million to help low-income council tax payers.

At this stage the detail of how councils are expected to use the £670 million funding for council tax support is not available, however it is now too late for councils to use this funding to make schemes more generous for next year.

It is presumed that this funding is intended to cover the cost of caseload increase and discretionary support and it is likely that funding will be distributed in a similar manner as the previous Council Tax Hardship Fund. Our analysis of this previous funding showed that those councils with more generous schemes retained higher levels of funding for discretionary support than those with less generous schemes. The impact of this additional funding on low-income households again risks being a postcode lottery. Councils will need to ensure that their discretionary support is well targeted to support their residents who are most in need.

The expectations of councils on how they will use the further additional funding for council tax debt and covid-related expenditure is also not yet clear. Whatever the guidelines, councils are likely to be charged with targeting support at the most vulnerable households. Alongside better integration with local services, it’s essential that councils have the tools to tackle debt, food and financial worries, so people are in a position to effectively look for work.

Policy in Practice works with leading local authorities who analyse their benefit administrative data via a LIFT platform to get visibility over their low-income population. This data analysis allows them to identify which households are in most need, target support and track outcomes. Importantly, LIFT enables councils to not only identify those likely to be vulnerable to health and financial crisis, but also provides a forecast of likely future caseload. An illustration of how important this type of intervention can be for individual households can be seen in a project, Re-imagine Debt, that Policy in Practice carried out with the Cabinet Office, Newcastle City Council and Barking and Dagenham Council.

Looking ahead: what we want to see in the Spring Budget

There is some welcome news in the Spending Review 2020, particularly around funding for councils. Nevertheless, it is disappointing that the government did not announce a continuation of Covid-19 welfare measures that were introduced at the start of the pandemic.

Those working at the frontline will hope that the government reconsiders the impact of an income shock caused by the withdrawal of these measures in the Spring budget.

We would also urge the government to revisit the decision to freeze housing support for private tenants. The current LHA rates that are being taken forward indefinitely are based on rents in 2019. Within a few years, any rents that are currently affordable for households in receipt of benefits are likely to have outstripped supply. This risks causing debt and homelessness, and will put additional pressure on council budgets. We would also urge the government to increase the National Minimum Wage to the levels planned pre-Covid. For many households living on the National Minimum Wage, household income is topped up by benefits. Low-income families require a wage which means that this top-up is not routinely necessary.

Finally, as unemployment is set to rise to 2.6 million next year the role of frontline organisations becomes ever more important in supporting households and preventing crisis. These organisations need to be able to provide the welfare advice necessary to allow those affected by Covid to make decisions that are right for them.

Councils have responded speedily to the need to support households and many use their data to target support at their most vulnerable residents. With additional funding promised to councils to support council tax payers and those affected by the economic downturn caused by Covid, this targeting of support becomes central to the wellbeing of residents.

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