The great reopening only emphasises the UK’s divergent fortunes

The writer is a public policy professor at the University of Cambridge

The cheerful crowds appearing on many high streets across the UK this week as retailers were allowed to reopen have given some economists hope that consumer spending will bounce back and drive a recovery. So it might. The pile-up of household savings is estimated at about £180bn and some argue that more of this will be spent than would be usual in a recovery. We will all be raring to go out and shop, eat, drink and generally be merry about the easing of lockdown.

Even if the aggregate figures show a vigorous recovery, though, they will be misleading. We are two nations, and only one will have scope for a roaring 2020s. To point out the obvious, people who have been able to work from home, spending less, for months will for the most part welcome the chance to get out and enjoy themselves. But many others do not have the money to do so, and indeed have amassed debts instead.

For those freelancers who fell through the gaps in furlough and self-employment support schemes, or those on low incomes or newly unemployed, the headache will be how to climb back out of a financial hole. The Resolution Foundation has reported recently on the surge in universal credit claims and evidence that many of these new claimants are further in debt than they were before the pandemic, or behind on essential bills.

A recent report from the parliamentary housing, communities and local government committee noted that about 800,000 people fell into rent arrears from March to December last year. Home buyers and people with credit-card debt and other loans have been able to apply for a payment holiday, but they will need to catch up with higher payments later. Many are worried about their credit score.

How big a dampening effect this has on the economy will depend not only on how much high-street spenders splash out but also on whether government spending, investment and trade contribute to growth, and how quickly unemployment — the number of claimants climbed from 1.3m in February 2020 to 2.7m in the same month this year — falls. Even if the optimists are right, that leaves two big economic challenges.

One is shorter term: how does the debt overhang get resolved? This goes for business debts too, including government loans. The worst outcome would be for continuing uncertainty about when the accumulated arrears will have to be repaid. The people who owe their card issuer, bank or landlord will not be able to spend anything more without some clarity about how much they are going to have available after meeting these commitments. Indeed, the risk is that they will have to spend less than they can now.

The longer-term challenge is the underlying pattern of employment that explains why we have become two nations with such sharply diverging fortunes. For years, economists have described the “hollowing out” of the labour market, meaning a divergence between skills and earnings at the top and bottom of the income distribution. Middling sorts of jobs on decent middling incomes, such as clerical work in banks or craft jobs in industry, have been in decline. 

About one in four workers in the UK is in “contingent” work: zero-hours contracts, short-term contracts, gig work, solo self-employment. Their ranks include not just the Uber drivers and Deliveroo riders, but gym instructors, hairdressers, those working in theatres or hospitality. We all know people in this insecure situation. 

They are more likely to be on lower earnings, have volatile earning and lack a pension. The Office for National Statistics recently estimated that just over 2m people — 7 per cent of the workforce — earn below the legal minimum wage. Fifteen per cent of the workforce is earning less than two-thirds of median income — a steep drop from 2019. Low-paid jobs have been the most likely to go during the pandemic. With one in every seven Britons on low earnings and one in four in contingent work, it would be hard to predict strong growth in a highly productive economy even without the shock of Covid-19.

Being only human (although an economist), I am eager to see high streets and restaurants buzzing, and was first in line for a post-lockdown haircut. And who doesn’t want to see a strong economic recovery? Without one, the prospects for jobs, tax revenues and public service spending, never mind investment in infrastructure and the green transition, will be dismal.

Yet that long-term problem needs tackling, through the enforcement of employment legislation, reform of education and training and a rethink of how society insures all its members against economic shocks. Thank goodness those now able to do so are out there splashing the cash and enjoying the return of something more like normal economic life. But let us be careful of our tone when we talk about “the economy” while such divergent fortunes remain.