Covid-19 has sharpened the divide between landlords and tenants, and debtors and creditors. We all must ask: whose side are we on?
Laurie Macfarlane is economics editor at openDemocracy, and a research associate at the UCL Institute for Innovation and Public Purpose. He is the co-author of the critically acclaimed book ‘Rethinking the Economics of Land and Housing’.
Cross-posted from Open Democracy
Last week the Bank of England predicted that the UK economy will shrink by 14% this year, which would represent the deepest recession in more than three centuries.
For many people, such economic statistics don’t mean much. But the real world consequences will be severe: someone, somewhere, will forced to take a significant financial hit. The question is: who should this be?
Right now, it’s clear who is being asked to shoulder the burden of the crisis. 7.5 million people have now been furloughed under the government’s Job Retention Scheme, many of whom have experienced a drop in income of 20%. Others have not been so lucky: a wave of redundancies has already led to more than 1.8 million new people applying for universal credit, which many cases will provide an income of just £94 per week.
While the government maintains it has introduced measures to lift the pressure on household expenditure, so far these have been limited to payment ‘holidays’ on mortgages and personal debt. However, holidays do not amount to a direct sacrifice of income on the part of creditors: payments are being deferred rather than waived, and must later be repaid with additional interest. In cash terms, holidays represent a transfer of wealth away from debtors towards creditors.
Renters have been left particularly exposed. While the government has made some changes to Local Housing Allowance, these will inevitably still leave large shortfalls between actual rents and housing support for many low-income tenants. At the same time, the government’s approach to renters so far has assumed that landlords can be trusted to “show compassion” and tenants can negotiate with them on a level playing field. Government guidance states that when the crisis is over, landlords and tenants will “work together to agree an affordable rent repayment plan” – seemingly oblivious to the significant power imbalances that exist between them.
Many businesses are also suffering. Although the government has provided some direct cash support to businesses (for example via the Small Business Grant Fund), and has extended business rates relief, the main pillar of its response has been to make it easier for businesses to take on more debt, which many will struggle to pay back. The government’s flagship Coronavirus Business Interruption Loan Scheme protects lenders, not borrowers: businesses who default on their loans will still go bust, while lenders can recoup 80% of the loan value from the state (and now 100% for the smallest loans).
Putting all this together, a common picture begins to emerge. As Christine Berry, Shreya Nanda and I outline in a new report for IPPR, while many households and businesses are facing severe financial hardship, there has been almost complete financial protection for ‘rentier’ income: that is, returns gained by extracting value by virtue of owning assets that are scarce or monopolised. While there are many different sources of rentier activity in the UK economy, perhaps the two most prominent are landlordism and financial services.
In the absence of substantive relief on rent and debt payments, a significant proportion of the money being pumped into the economy by the government will end up flowing to banks and landlords. We estimate that 13% of state spending on the Job Retention Scheme is likely to end up in the pockets of landlords – amounting to £2.8bn under a three month lockdown. When mortgage and loan repayments are added, this rises to a combined 45% of total spending, or £10bn. This is on top of the £23bn that already flows to landlords each year via housing benefit.
When compared to the significant hardship faced by others, the protection of rentier income is striking. Because rent payments will not be reduced in the long term, landlords are not being asked to share any of the burden of the economic downturn. Banks who offer payment holidays are not sacrificing any income in the long-term, since they will recover the missed payments with interest. The Coronavirus Business Interruption Loan Scheme substantially protects banks against losses on crisis loans, while they continue to capture the full upside of these loans without limitation on interest rates.
Rather than being shared across society, it is clear that the economic risks and costs of the lockdown are disproportionately being shouldered by those who are already financially vulnerable. Those least able to weather the crisis are being asked to make sacrifices in order to protect the incomes of those most able to weather it.
In many ways, this shouldn’t be surprising. Most of the government’s response measures essentially pump more money through a system that is designed to produce unequal outcomes, without changing the power relations within that system. Without steps to actively redress these inequalities and to ensure the risks of the crisis are more fairly shared, the UK’s economic recovery is likely to be slow, uneven and unfair, exacerbating existing structural imbalances.
What can be done to avoid this? In the short-term, alongside a substantial strengthening of the social safety net, struggling households could be granted a freeze on rent and debts without new liabilities accruing. Unlike payment holidays, a freeze would waive part or all of payments entirely, without the accrual of arrears. As the New Economics Foundation have proposed, mortgaged landlords could be granted a freeze on mortgage payments for the same period. For smaller landlords who genuinely rely on rental income and banks that would face liquidity problems, targeted, post hoc income support could be provided by the government and Bank of England.
While current approach support the incomes of struggling households to enable continued flows of rent and interest, this approach would suspend these payments and then support landlords and banks where needed.
Meanwhile, there is a strong case for capping the interest rates on state-backed loans to businesses at 0% or 0.5%, as in the successful Swiss scheme. However, in many cases interest-bearing loans may not the right mechanism to support businesses through the crisis. An alternative would be to provide a combination of direct grants and equity investment. As Common Wealth and others have suggested, this could include establishing a state holding company to purchase and safely mothball distressed SMEs until the point when they can be re-launched as part of the economic recovery.
If such short-term measures are not taken, it will be even more important to take longer-term steps as we emerge from the crisis to redress the pre-existing imbalances between creditors and debtors and landlords and tenants. For the time being, the cost of the various government interventions is being largely underwritten by the state in the form of increased public borrowing, state guarantees and central bank financing. While this is sufficient to meet immediate funding needs, how the costs of these measures are ultimately shared across society over the long-term ultimately depends on political choices.
Worryingly, the UK government is already drawing up plans to impose another round of austerity, which would see the costs of the crisis fall most heavily on those least able to bear them. In order to avoid this, it is essential that an alternative set of post hoc demands are developed to ensure the costs are spread more fairly, which could include higher taxes on wealth and land ownership; debt relief and write-offs; and higher inflation (so-called ‘financial repression’) to help erode the overall burden of indebtedness in the economy.
But while all these measures may succeed in redirecting some flows of income around the economic system, the system itself would remain substantially unchanged. This means that they remain vulnerable to being undone or circumvented by those who stand to benefit – as has happened in many cases throughout history. In the long run, if we want to build a post-crisis economy which permanently redresses these growing imbalances of wealth and power, we need to envision structural reforms to tackle rentier power.
In relation to banking, this could include taking advantage of RBS’s historically low share price to bring the bank into full public ownership, and transforming the British Business Bank into a full-fledged National Investment Bank. This would help to break the grip that the large, profit-maximising banks have over our money, credit and payment systems – and provide a means for finance to serve the public interest in good times and bad.
In relation to housing, the aim should be to move to a society where houses are viewed as somewhere to live, not as vehicles for accumulating wealth. This could involve rent controls, tax reforms, and steps to expand alternative models of land and housing ownership that limit the opportunity for rent extraction. If the economic downturn involves a collapse in asset prices, the government could establish a vehicle to purchase assets, including but not limited to housing, on behalf of the public in order to help challenge inequalities of resource and control in the economy and avoid assets falling into the hands of predatory capital.
Some will object to these measures on the basis that they interfere with property rights. Indeed, leader of the opposition has already rejected the idea that landlords should take a haircut on rental income on these grounds.
But property rights are not neutral or fixed; they invariably reflect power and class relations in society. The interests of landlords are diametrically opposed to that of tenants, as are the interests of creditors and debtors. It is simply not possible to protect the interests of both at the same time. Choosing to protect the interests of one means demanding sacrifices of the other.
If we are to navigate a route out of this crisis towards a fairer and more sustainable economy, ultimately we need to have a clear idea about who creates value in society, and who simply extracts it.
The time has come for all of us to pick a side.
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