No-deal Brexit or not, the UK has never been less prepared for recession

The UK’s economic stabilisers – our system of tax and benefits – needs reinforcing with a Weekly National Allowance.


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It is ironic that the latest GDP estimates are out on the same day that the UK’s economic landscape could have changed entirely, and forever. But even with the immediate economic threat of a no-deal Brexit pushed back by two weeks, the latest data makes for grim reading.

Confidence is grinding to a halt under the weight of uncertainty. Today’s numbers confirm a fourth consecutive quarter of shrinking business investment, contributing to the slowest annual growth in GDP since 2012. On average, the UK experiences a recession every ten to 15 years. More than ten years on from the financial crisis, no-deal Brexit or not, the question is not where the next economic shock might come from, but whether the UK is equipped to deal with it.

Given this backdrop, it is disturbing that UK macroeconomic policy makers have rarely been as powerless as they are today. The Bank of England’s base rate of interest – used to fight recessions by lowering the cost of credit – has been stuck close to record lows for a decade. New interest rate cuts would quickly come up against what economists call the “effective lower bound” – a point beyond which further reductions have little or no positive effect on spending in the economy. Past experiments to fix this problem – such as so called quantitative easing (QE) and the “term funding scheme” – are widely regarded to be a poor substitute, including by the Bank of England itself.

In such circumstances, fiscal policy would normally take on more of the heavy lifting. But recent precedent, with cuts to public investment and day-to-day spending while in the midst of recession and recovery, suggests precisely the opposite. With austerity continuing in this month’s Spring Statement, and with parliament and national opinion polls in balance with no clear majority, the question of whether government could deliver a sufficient stimulus following a downturn remains uncertain at best.

A country’s welfare system normally represents the third major recession fighting tool. It is known as part of the “automatic stabilisers” for its ability to maintain a minimum level of spending during a downturn. In this way, social security would normally be just the first line of defence. But with monetary policy and active fiscal policy constrained (for economic and political reasons, respectively) the UK’s stabilisers are now among the last lines of defence as well.

This would be concerning at the best of times. But after a decade of nearly unprecedented welfare cuts, the UK’s war-torn and threadbare safety-net should now be a cause for downright alarm. Better policy instruments and coordination between monetary and fiscal policy is doubtless needed, and a number of options are currently being debated. But strengthening the UK’s automatic stabilisers is the urgent priority that (almost) no one is talking about.

To this end, a recent proposal from the New Economics Foundation could represent a powerful first step. The idea is to swap the Personal Allowance of income tax with a Weekly National Allowance (WNA) paid in cash to nearly all adults and equal to the annual value of tax that would otherwise be paid on the first £12,500 of income. The WNA would also include a restoration of child benefit to its 2010-11 real-terms value.

In normal times the new payment would be cost neutral and highly redistributive. It would be funded entirely from abolishing the personal allowance and the expected savings from means-tested benefits. The poorest families who do not benefit from the personal allowance in full would see their disposable incomes rise, while those in the higher rate tax bracket would contribute a little more in tax, since this threshold moves pound-for-pound with a fall in the personal allowance. Everyone else would see either no change or their child benefit rise.

But during recession, the advantages of the WNA would multiply further. The economic benefits of the existing personal allowance diminish if unemployment starts to rise, since lower taxes on earned income are of little use to anyone without a job.

By contrast, the Weekly National Allowance would be paid whether in or out of work. Crucially, because families are more likely to spend spare cash rather than save it when their income drops – what economists call the “marginal propensity to consume” – the WNA would provide an automatic boost to demand whether recession precipitated high unemployment, lower real wages, or both.

The WNA could also provide an effective new tool for active recession management as well, with the option for government to raise or lower its value in response to the economic cycle. In theory, any temporary increases could also be funded directly or indirectly by the Bank of England. In this way, the WNA might also lay the ground for more effective future coordination between monetary and fiscal policy, such as that explored by economists like Simon Wren-Lewis and Eric Lonergan.

With such low-cost options on the table, the question is not whether we can afford to reinforce the economies stabilisers. Rather it is a question of whether we can afford not to.

Alfie Stirling is head of economics at the New Economics Foundation. He tweets as @alfie_stirling.