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by Rajiv Prabhakar
30th April 2020

The COVID-19 crisis has already prompted mass state intervention in the economy. In the UK, the Conservative government announced in March a range of support for businesses affected by COVID-2019 that amounted to £330 billion or around 15% of Gross Domestic Product.

The UK government announced a Coronavirus Job Retention Scheme that provides a taxable grant to employers for furloughed employees worth 80% of the employee’s wage cost (up to £2,500 a month and for an initial period of 3 months) plus associated National Insurance and employer contributions to auto-enrolment pension costs. A similar package of support was also provided to the self-employed. Also, in the same month, President Donald Trump signed a Coronavirus Aid, Relief and Economic Act that promised $2 trillion of federal government help to households and businesses. Among the measures enacted are a set of direct payments to households that amount to $1,200 per person for one year and $500 for each child under 16 years of age. The payments are tapered off for those on high incomes.

This government support might be more accurately be described as relief rather than a stimulus as the aim is to protect people and businesses from the economic fallout from the crisis rather than pump-prime economic activity. Some commentators argue (Brookings, Grace Edna et al., 2020) that the fact that government spending has increased in this manner shows that is always possible to have a well funded welfare state. A lack of spending on public services and social protections is then driven by political choices rather than economic necessities.

I am currently completing a book for Policy Press to be published next year called Financial Inclusion: Critique and Alternatives. In this I argue that financial inclusion – broadly the access that people have to mainstream financial services such as banking, savings, insurance and credit – has been an important part of social policy debates for at least 25 years. Financial inclusion is sometimes likened to being ‘connected to the mains’ – just as electricity flows through the mains, money flows through the financial system.

This financial inclusion agenda aims to increase individual involvement in the financial system. Particular emphasis is given to reducing the barriers that vulnerable groups (such as those on low incomes or some lone parents) in accessing mainstream financial services. This agenda has, however, provoked strong opposition from those who worry that it ultimately shifts people from the protections offered by the welfare state and exposes them to the risks associated with financial markets.

People’s daily decisions such as buying food, paying the rent or mortgage on a home or paying electricity bills are part of the everyday life of finance in most countries. In the book I argue that, though that it is possible to shape financial inclusion in different ways, it does not necessarily have to turn people from citizens into consumers.

Financial services form the ‘supply side’ of financial inclusion, that is the services that citizens access. The UK Government signalled the importance of financial services when it declared that the sector contains key workers who were allowed to travel to and from work during the lockdown. Banking is important as a channel for loans to companies as well as payments to individuals. In the US, federal government direct payments to individuals will be made into bank accounts or through cheques. Payment systems enable retailers to encourage payments through contactless cards to help maintain ‘social distancing’.

Money is a key part of financial inclusion. For example, savings are important for helping people cope with drops in income during the crisis. One way of ensuring that all citizens have access to money is to provide them with a universal basic income as part of the response to COVID-19. A universal basic income promises a regular income payment to all citizens with no duty to use this to find paid work. The US government has provided citizens with emergency direct payments. Although these direct payments are not in themselves a universal basic income as they are a one-off payment, it might add credibility to those calling for a universal basic income as a response to the pandemic (World Economic Forum, Guy Standing, 2020).

However, there are ways that the pandemic might worsen financial exclusion. The financial impacts of COVID-19 may worsen economic inequality. For example, those on low paid and insecure employment may be more prone than others to lose their jobs. This can then feed into financial exclusion if people then have difficulty accessing financial services, such as affordable credit. Access to broadband and the internet is also important for enabling people to work remotely from home but, those groups who face a ‘digital divide’ face the prospect of greater barriers for paid work. In the US, Pew Center Research notes that in 2019 44% of adults in the US with household incomes below $30,000 do not have broadband at home.

Banks are already encouraging the greater use of online or mobile phone banking to discourage people from going into branches. These moves predated the crisis and are understandable as part of the message to stay at home to cut the spread of the virus. But, once the restrictions begin to relax and life returns to normal, the greater use of financial technology to access banking services may continue. The digital divide may become more prominent in future efforts to reduce financial exclusion. The COVID-19 crisis has brought some of these issues into sharp relief. It is important to address the needs of those who access financial services through other means beside technology such as bank branches or paying for goods or services with cash, to avoid them simply being left behind. If financial inclusion is to be meaningful, then people should also have access to money. The UK and US governments have both made emergency payments to protect households and businesses. One question is whether these emergency payments might pave the way for something more enduring such as a basic income. Although there are competing arguments about a basic income, it could form part of the debate about a recast financial system after the crisis.

Rajiv Prabhakar, author of the forthcoming book Financial Inclusion: Critique and Alternatives is Senior Lecturer in Personal Finance at The Open University and Associate Fellow at The Centre for Housing and Assests Savings Management (CHASM) at the University of Birmingham.

 

Financial Inclusion: Critique and Alternatives by Rajiv Prabhakar is available for pre-order on the Policy Press website. Pre-order here for £21.56

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