Insuring the Nation: UK government emerges as one of the country’s largest insurers

July 4, 2020

2 min read

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What's going on here?

Since the beginning of lockdown, the UK government has insured individuals against the risk of unemployment through its furlough scheme in a reversal of previous government policy.

What does this mean?

Under its furlough scheme, the UK government pays 80% of an employee’s salary up to a total monthly sum of £2,500 per employee (to read our articles on that, click here and here). It allows employers to retain employees even if doing so is not profitable, where the alternative would have been employees losing jobs.

The furlough scheme was a step change in policy for the government. In recent decades, risk has been pushed onto individuals. One notable example is “zero-hour” contracts, whereby employers do not guarantee a number of hours of work. As a result, during downturns employees rather than employers, suffer income losses. 

The UK’s approach to pensions has also shifted cost burdens onto individuals. Under the old “final salary” pension schemes an employer would promise a certain weekly amount no matter the market conditions. These schemes have largely been replaced with fixed salary schemes, with employees receiving matched contributions. Employers usually entrust the totality of these contributions to a professional fund manager. Employees therefore bear the risk as the final pay-out will partly depend on the performance of the wider market.

What's the big picture effect?

There is reason to believe that the furlough scheme is a one-off. It is incredibly expensive, with a monthly cost that is roughly equal to the outgoings on the NHS. Covid-19 is also an exceptional shock to the economy that required the government to restrict trade on public health grounds, and the furlough scheme is a way for the UK government to compensate businesses for a fall in consumer demand caused by this restriction. We may therefore not see a similar insurance scheme in times of a cyclical crisis (e.g. the Great Financial Crisis) or a downturn in a specific industry (e.g. steel or car manufacturing).

However, such insurance may still be politically popular. The average working-age constituent in the newly-won Conservative constituencies in the north of England receives 80% more in state benefits than their counterparts in the (wealthier) Conservative heartlands. UK government bonds are enjoying a record low yield (the holder’s return on investment) of 0.2%, allowing the government to borrow cheaply. Public opinion has moved against austerity, with around two-thirds now believing that it has weakened public services. The tax raises required to pay for any future insurance may, in part, be levied on large companies (e.g. a Digital Services Tax, which we covered here), making them more palatable to the public. As a result, the advisory teams of law firms, particularly those specialising in employment law, may see demand for their services rise should a similar shock and the ensuing government intervention occur again.

Report written by Darinka Lipovac

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