Don’t make the self-employed the punchbag of the next recession

Two months ago, few people had heard of Rishi Sunak. He is now about to go down in history as the most interventionist peacetime chancellor. His plan to pay 80 percent of the wages of employeeskept on by their employers will help to mitigate the impact of the inevitable recessionthat will follow the shutdown of most business activity. But it has left a lot of people asking ‘what about the self-employed?’ They have been ‘hung out to dry’ says Paul Mason.

Self-employment passed the 5 million mark at the end of 2019 and now accounts for more that 15 percent of those in work. While the rise in self-employment has been celebrated by politicians and commentators as a success story and a sign of entrepreneurialism, there is a story less often told. A lot of the self-employed are skint. Or, if not totally skint, they are not earning very much.

The rise in self-employment hasn’t been matched by a rise in self-employment earnings. Most of the increase in the number of businesses in the UK since the start of this century has come from firms under the VAT threshold. The number of employing and registered businesses has increased roughly in line with the size of the workforce. The big rise in self-employment has seen a steady increase in the number of low turnover businesses.

 Source: Department for Business, Energy & Industrial Strategy, Business population estimates 2019

People often assume that the self-employed are minted because a few self-employed people earn a lot of money. However, most don’t. A report by the Institute for Fiscal Studies (IFS) last summer found that the mean annual self-employed income (£30,000) was just below the mean employed income (£31,000). However the median self-employed income was only £14,000 – much lower than the employee median of £22,700. The mean figure for the self-employed is skewed by a small number of very high earners at the top, usually working in partnerships.

Strip out the partnerships and the numbers look even worse. The figures for sole traders, who are around 85 percent of the self-employed, are even lower, with a mean income of £21,000 and a median of £13,000.

Sole trader incomes were particularly badly hit after the recession. Since 2008, the aggregate sole trader profit has fallen in real terms. That’s an astonishing fact. There are 800,000 more of them than there were in 2008 but they are making less in total than their counterparts did in 2008. I’m reminded of those nature programmes where, as the oasis dries up in a drought, more and more animals arrive to drink from the rapidly shrinking pool.

Consequently, the average real-terms profit for sole traders has fallen.

Chart source: Who are business owners and what are they doing?” – Institute for Fiscal Studies

As the IFS remarked:

These falls in profit are consequential: they represent falling living standards for individuals and households, and falling value added from the sole trader sector of the economy.

While the image of the rich, tax dodging self-employed businessman may persist, the majority of the self-employed are likely to be on lower incomes than those in employment. Many are people who were already struggling to get by.

The restrictions brought in to combat the coronavirus outbreak will hit them hard. Entitlement to the equivalent of statutory sick payand the removal of the minimum income floorfor Universal Credit will help. As the Resolution Foundation explained:

With this change, UC can essentially play the role of a means-tested unemployment benefit or an earnings-replacement benefit for the self-employed. This change will make a significant difference to some families’ incomes should work dry up for the self-employed.

While that might help the very lowest earners it will still leave many self-employed people dangerously exposed. According to the Telegraphthe chancellor is “racing to plug “gaps” in his latest support package for businesses and workers, as he faces claims that he has “left behind” the self-employed.” This will be more difficult when dealing with people whose incomes are not assessed through PAYE and what emerges probably won’t be as generous as the support for the employed. Nevertheless, among the 5 million self-employed are a lot of people who are going to need help and it would be unfair to leave them out.

The incomes of the self-employed took a big hit after the financial crisis and have still not fully recovered. As I said a few years ago, they became the punchbag of the last recession. Let’s not make them the punchbag of the next one too.

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