Fraudulent Activity

The measures the government took to protect employment, wages and businesses during 2020 and 2021 were a success. Unemployment was kept relatively low, the furlough scheme (together with the Universal Credit uplift) kept a lid on poverty, while the rate of business failure dropped. This last was partly due to the normal process of Companies House dissolution being in abeyance during the middle of 2020, but even after the catch-up in September, the cumulative number for the year was lower than in 2018 and 2019, though there was a subsequent above-trend increase in 2021. The closure of businesses on a scale not seen since the early 1980s did not transpire, though this may simply reflect the existing high number of zombie firms in the economy due to low interest rates since 2008. Perhaps surprisingly, business formation numbers were higher in 2020 than 2019, at 781k versus 691k. This was partly due to the creation of more online retail businesses prompted by the change in consumption habits during lockdown, but it also reflected a measure of fraud as fictitious companies were formed to take advantage of the pandemic financial support schemes. 

It now transpires that £5.8 billion of the £81.2 billion spent across those schemes has been lost to fraud and error, with £4.3 billion of that already written off. Though the government's own statement on the matter doesn't mention it, preferring to focus on the Coronavirus Job Retention Scheme (CJRS) and the Self-Employment Income Support Scheme (SEISS), the bulk of this relates to the Bounce Back Loan Scheme (BBLS), which accounted for £47 billion of the total spend and was managed by the Department for Business, Energy & Industrial Strategy (BEIS). The Public Accounts Committee anticipated in December 2020 that a third to a half of this would become bad loans (i.e. not repaid due to insolvency) and flagged the government's apparent difficulties in identifying, let alone stopping, fraud on top of this. It looks like the final fraud rate will be about 10% of the spend, which is remarkably high. The resignation this week of a junior minister in the Lords has brought the BBLS back to prominence, though the media seemed as interested in what this said about the Prime Minister's weakening grip as the ethics of British business.

Could this level of fraud have been avoided? While there has been stinging criticism of the attitude of the Treasury and the competence of the Department of Work and Pensions (DWP) and BEIS, the counter-argument has been that this was an emergency and not worrying too much about fraud was the correct policy in the circumstances, given that the alternative might have caused significantly greater unemployment, business failure and financial distress. However, this instrumental argument distracts from a more fundamental question, which is whether it made sense to approach the problem the way the government did. For example, the BBLS was designed to facilitate bank lending at commercial rates to SMEs by providing a state guarantee for the loans. Once in place, the banks had no interest in checking for fraud, whether the government wanted them to or not, as they weren't exposed to any losses. In effect, the state went with the grain of the banking sector's preferences and habits, providing what amounted to an advance bailout for bad loans.

Similarly, the CJRS scheme assumed that the state could most appropriately support wages during furlough by allowing employers to claim the cost back, rather than making use of an existing mechanism (PAYE) to calculate wages and pay employees directly, which if nothing else would have lessened the "red tape" burden on businesses. It is hard to avoid the conclusion that the government preferred this approach because it maintained power relations between employer and employee. For example, now that employers have started to demand that employees return to the office, despite continuing risks of infection in sometimes substandard working environments, employees have little leverage. This doesn't mean that direct payments would have preserved working-from-home for longer but that employees might have been more emboldened to ask for improvements in conditions as a quid pro quo for a return. That power relations were an important consideration is evident from the relaxed attitude towards corporate employment fraud compared to the more stringent policing of benefit fraud.

In the years leading up to the pandemic, benefit fraud and error was running at about £4 billion a year. The majority of this was for benefits not related to work, such as housing benefit, personal independence payments and pensions. Universal Credit (UC) has a systemic vulnerability to fraud (or honest error) because claimaints can increase their work hours, or otherwise change their circumstances, without this being correctly adjusted for. As UC has been rolled out, and as many more people have claimed during the pandemic because they didn't qualify for the furlough or self-employed schemes, the rate of fraud and error has shot up to 14.5% of expenditure. If nothing else, this highlights what an inefficient system UC actually is, as much as how easy it is to defraud it. The furlough scheme was also open to abuse by employers - e.g claiming for workers who had already quit their jobs, or adding friends and family as spurious employees - while the self-employed scheme was vulnerable to people who had already chosen to stop working, or had shifted to employment and were now on furlough, claiming for extra months of income. 

It's interesting to speculate how this would have been handled if we'd had a Universal Basic Income (UBI) system in place. This would have covered everyone (so no spurious employees), could have paid direct (so no payroll fraud), and could have smoothly compensated when paid employment income stopped (as it would be automatically reported via PAYE). But one of the reasons why we don't have UBI is that it provides workers with leverage: the ability to turn down crap jobs, to refuse intolerable or worsening conditions, and to vary hours to accommodate social responsibilities (such as isolation when infected or care-giving to others). As such, it is the antithesis of the government's preferred approach with its focus on maintaining the power of capital over labour. The importance of that dynamic is all-too evident in the government's insistence that employees should return to the office or factory as soon as possible. This wasn't simply in support of the narrow financial interests of commercial landlords and city centre retailers. It was a wider insistence on the restoration of the power relationship.

It wouldn't be fair to say that the government has turned a blind eye to corporate fraud in respect of the pandemic support schemes. It does expect to recoup £1.5 billion of the lost money, after all. However, it doesn't appear to have pursued it as vigorously as it has previously pursued benefit claim fraud (and overpayment errors), despite plenty of warnings over the last two years. This limited diligence stands in marked contrast to the government's much more tolerant, even lackadaisical, attitude towards the money lost via public sector outsourcing during the pandemic, most famously the VIP lane for PPE and other supplies contracts and the £37 billion test and trace programme. Of course, no one is suggesting that the likes of Deloitte and Serco have been guilty of fraud (though that word is not inappropriate in its non-criminal sense when applied to Dido Harding). This looting of the public treasury is all above board: exorbitant payment in return for ineffective or substandard services. And in overseeing this waste, the government is merely continuing the established practice of the state.

The common thread in all these phenomena is the determination of a Conservative government to defend and conserve existing power relations, from the control of employers over workers' incomes to the parasitic symbiosis of consultancies and the public sector. The talk of the Tories rediscovering the developmental state, just like the claims that Labour's current leadership is well to the left historically on economic policy and employment rights, mistakes the rhetoric intended to substitute for a discredited neoliberalism for a radical agenda. The reality is an absolute determination, across both parties, to preserve the structural asymmetry that has been established between capital and labour since the early-80s. We are witnessing two types of fraudulent activity: the opportunism of a capitalist class that sees profit in the pandemic and a political class guilty of hypocrisy and deceit. The charges laid against the Prime Minister do not provide a lighting rod for a cleansing jolt to the system but merely a distraction from the continuing institutional rot. A rot that put him into Number 10 in the first place.