The plight of struggling private renters has returned to the political agenda. Labour has urged that they be given two years to pay back rent arrears accrued during the crisis, but has stopped short of demanding that those arrears be wholly or partly waived. The party believes that restricting private landlords’ rental income would breach their property rights, requiring the state to compensate them at a cost of £4.4bn a month: “free money for the already reasonably well off”, as a key legal adviser put it.
Some have taken issue with this assumption, pointing out that the right in question is qualified. But regardless of one’s position on this legal debate, it should shine a light on something which until now has passed largely unnoticed: the government’s coronavirus response is already providing landlords with free money.
Government support via the furlough scheme (along with some minor changes to the benefits system) is the main thing enabling people affected by the crisis to keep paying rent and bills. In a report for IPPR released today, Laurie Macfarlane, Shreya Nanda and I calculate that 13 per cent of state spending on the furlough scheme is likely to end up in the pockets of landlords – amounting to £2.8bn under a three-month lockdown.
If we add mortgage and loan repayments, this rises to a combined 45 per cent of total spending, or £10bn. (This is on top of the £23bn that already flows to landlords each year via housing benefit.) Without the furlough scheme, many more people would have lost their jobs and simply been unable to meet these payments. It’s therefore fair to describe this as an implicit bailout for landlords and banks.
Meanwhile, many low-income workers will still lose out financially and struggle to make ends meet. We calculate that a furloughed worker in the second-lowest income decile could be in debt by a further £12 a week, taking into account likely changes to their spending as well as their income. (These groups already do not earn enough to cover their outgoings.) The 1.8 million people applying for Universal Credit will be even worse off. Even if landlords agree to suspend rents – which many are still refusing to do, despite having access to mortgage holidays – this only stores up bigger debt problems for later, when the arrears have to be paid back.
In effect, those least financially able to weather the crisis are being asked to take on debt to maintain income flows to those most financially able to weather it. The only people not being asked to share the burden are “rentiers”: those who make money by controlling assets rather than from productive work.
Landlords are being particularly well-shielded, as the state and tenants both accept additional debts to absorb the economic shock. But why should flows of economic rent be uniquely deserving of protection? Regardless of whether they can be legally compelled to do so, landlords clearly feel little moral or political pressure to share the pain: that must change.
In a recent survey, only a third of landlords said they would struggle to pay a mortgage if they did not receive rent that month; 39 per cent do not have a mortgage at all. By contrast, in 2017 a third of private renters were already going into debt to pay their rent, and most have no savings. Six in ten have suffered financially because of the pandemic, of which one in five report having to choose between rent and food or bills. Citizens Advice has warned that 11 million people face a “looming financial cliff-edge” when furlough support and payment holidays come to an end.
As after 2008, this debt overhang will be a significant drag on household spending and thus on economic recovery. The insulation of landlords and creditors from the crisis is not only deeply unjust – it may yet be economically catastrophic.
A similar dynamic afflicts small and medium-sized enterprises (SMEs). They too are being asked to weather the crisis largely by taking on debt, which many will struggle to pay back. The government’s flagship loan guarantee scheme protects lenders, not borrowers: businesses who default on their loans will still go bust, while lenders can recoup 80 per cent of the loan value from the state (and now 100 per cent for the smallest loans).
Little has been done to prevent banks profiting from these state subsidies: interest rates have not been capped, except for the 100 per cent state-backed “bounce-back loans”, which are fixed at 2.5 per cent. Meanwhile, banks themselves can borrow at virtually 0 per cent, and enjoy low-cost funding from the Bank of England. Once again, bank losses are being socialised while their profits remain privatised. Compare this to the Swiss scheme, where interest on the state-backed portion of crisis loans is set at 0 per cent or 0.5 per cent.
If we do not act to rebalance the burden, the economy will not “bounce back”. The recovery will be slow and painful, worsening inequalities between the working poor and the asset-owning wealthy. Without emergency steps to pre-empt this, it will be even more vital to take strong steps to rebalance economic power in the longer term. Some have proposed doing this through tax: whether a one-off emergency wealth tax, or reforms such as taxing capital gains at the same rate as income. Rebalancing could also be achieved through regulation, such as rent controls.
Ultimately, however, we must tackle the root of the problem by democratising asset ownership itself. This could include the state taking advantage of rock-bottom asset prices to acquire ownership stakes, balancing the liabilities it is shouldering as it keeps the economy on life support.
Common Wealth have proposed a state-holding company to acquire viable but struggling businesses and refloat them when the economy improves. RBS, 62.5 per cent state-owned, is already the single largest provider of crisis loans to small businesses. At current prices, buying up the rest and creating a genuine public interest bank could cost less than £5bn – a small amount relative to the government’s crisis spending. The same principles can be applied to housing, with a massive expansion of public and community housing.
The UK economy had big problems before the Covid-19 crisis, and the unequal distribution of burdens will make these problems even bigger. If we are serious about building a better system, we must envision equally big solutions.
Christine Berry is a researcher and the co-author of People Get Ready!
Laurie Macfarlane is economics editor of openDemocracy