The government needs to learn lessons from its furlough scheme and make earnings insurance a permanent feature of a radically reformed welfare system, a thinktank has said.
The Resolution Foundation, which focuses on the needs of middle- and low-income households, said emergency action during the pandemic had protected living standards but also highlighted pre-crisis flaws in the welfare state.
In a report, the thinktank said policies such as the furlough and a similar scheme covering many self-employed workers meant average household incomes had remained broadly flat in 2020 despite the biggest fall in national output in three centuries.
The Resolution Foundation said protecting incomes had only been possible by fundamentally reshaping the welfare state “at very short notice, and at considerable cost”. Expenditure on the furlough, support for the self-employed and a £20 a week increase in universal credit (UC) had cost £82bn over the past year.
While the unprecedented nature of the Covid-19 crisis had been the driving force behind the massive increase in spending, the thinktank said it also reflected two significant defects of the welfare state.
One inadequacy – demonstrated by the fact that before the pandemic one in four families receiving UC had cut food intake or had meal patterns disrupted – was the low level of the basic safety net for families.
The Resolution Foundation said necessary changes went beyond maintaining the £20 a week boost at a cost of £7bn and could include levelling up support for the under-25s (cost £950m) and increasing the child element of UC by £5 a week (cost £1.4bn).
A second weakness, according to the thinktank, was the the lack of earnings insurance – where benefit entitlements are linked to previous earnings – for those experiencing a period of unemployment.
Permanently moving to a system of earnings insurance where unemployment support was paid at 80% of previous pay for three months would be relatively inexpensive when jobs were plentiful, costing £900m a year based on 2019 unemployment levels. However, the cost would rise considerably to £3.25bn during periods when unemployment rose sharply such as in 2009.
The report said earnings insurance would mean those losing their jobs were automatically protected in future downturns, rather than having to rely on governments redesigning unemployment support in every crisis.
Mike Brewer, the chief economist at the Resolution Foundation, said: “Simply returning to the old system is not good enough after what the country has gone through.”