Paying for the pandemic: The economic consequences of COVID-19 This article was first posted here on 15 January 2021. Find out more about the Health Foundation inquiry. The COVID-19 pandemic has highlighted the relationship between income and health. Low income affects what people can buy and can bring on stress, which risks harming their mental and physical health. Poor health limits opportunities for good work and future employment prospects. People's income has been affected in a range of ways, with some groups affected more than others. Policy choices made in response to the pandemic and in recovery have consequences not only for the economy but also for the nation's health. Government policy has protected household incomes… The UK’s pandemic experience reminds us that in times of economic turmoil, income inequality is impacted not just by the economic shock itself, but also by the government’s policy response. Crucially, while we are relatively powerless to affect the former, the latter is a direct choice. The societal restrictions introduced to contain the virus have hit some sectors harder than others, with hospitality and retail particularly affected. A range of studies have shown that it is younger workers, lower earners, black and minority ethnic workers and those on atypical contracts who have been most likely to face reductions in hours and earnings. But analysing disposable household income tells us a different story: the distributional effect of the crisis appears much more even. Household income is determined by employment and pay of all household members (not just individuals), as well as taxes paid and benefits received. A study by the Resolution Foundation shows that, in the early stages of the pandemic at least, household incomes appeared to fall more in the top half of the (non-pensioner) income distribution than in the bottom half. This implies that income inequality may well have narrowed slightly during this period. In part this outcome reflects the fact that lower earners are spread across the income distribution. And of course, the lowest income households tend to have the lowest levels of employment – meaning they are less likely to be affected by upheaval in the labour market. This much is true of most economic downturns. But the much more important factor at play in this instance is the corrective work being done by government policy – with two key elements. First, there is the considerable financial support provided by the Coronavirus Job Retention Scheme. Furlough payments have protected millions of workers from the scale of income drop that unemployment would otherwise cause. Second, there is the automatic stabilisation provided by the benefits system, which has been actively amplified in response to the pandemic. The government increased some social security payments in March 2020 by introducing changes to Universal Credit and the Local Housing Allowance. Without this £9bn boost to welfare payments, the economic impact of COVID-19 would have been straightforwardly regressive. Resolution Foundation analysis suggests that incomes at the bottom of the working-age distribution would have dropped by more than 10% (relative to levels in the previous financial year) without such intervention, as Figure 1 shows. Figure 1: Change in real (CPI-adjusted) average equivalised non-pensioner disposable household income, after housing costs, by income percentile, before and after benefits changes: UK, 2019-20 to May 2020 Source: Resolution Foundation nowcast and analysis of DWP, Households Below Average Income …but the living standards squeeze is felt most acutely by lower income households While the government’s economic policies mean that the pandemic downturn appears to have had little effect on household income inequality in the UK to date, we should not conclude that all is well. To do so would be to miss the broader point that incomes have generally fallen since the start of the pandemic. And importantly, while the proportional drops in incomes across different households may be relatively even, the consequences of those reductions are being felt much more acutely by some. Restrictions on opportunities for eating out, holidaying abroad and other leisure activities have pushed down spending in many households – especially higher income households who typically spend more on such items. In contrast, lower income households have recorded more modest spending reductions, and are more likely to have had to dip into their savings. This stark result is shown in Figure 2: on the whole, lower income households have responded to the crisis by spending their savings, while higher income households have added to theirs. Figure 2: Net balance of UK households reporting an increase in savings due to COVID-19 (proportion reporting an increase minus proportion reporting a decrease), by household income band: July 2020 Notes: Question posed: ‘As a result of the measures taken around the coronavirus pandemic, would you say that your household savings have increased, decreased, or stayed the same?’. Data were collected between 3 and 6 July 2020 and are not seasonally adjusted. Source: Bank of England, Monetary Policy Report August 2020, Box 3, p36 This is backed up by work from the Resolution Foundation, which uncovers a strong inverse relationship between the levels of savings held by households heading into the crisis and the likelihood of their subsequently having to use those savings to fund everyday spending. Similarly, more than half of those households in the bottom fifth of the working-age distribution reported relying on credit to cover living costs in September 2020, compared with less than a third of those in the top fifth. The risk is that this reliance on savings and credit will quickly turn to problem debt, with a report by the IFS showing that the proportion of lower income households falling behind on council tax and utility bills rose significantly during the first national lockdown (relative to a pre-crisis benchmark). The living standards impact has implications for health due to the immediate lack of resources for some, but also the stress and anxiety that can be caused when in financial difficulty. Such different experiences reflect the fact that the UK entered the pandemic with high income inequality by international standards – and that should worry us. The pandemic may not have widened income inequality (yet), but – like the long living standards squeeze that took hold in the aftermath of the 2008 financial crisis – it has exposed the consequences of our failure to reduce inequality in any meaningful way over the past 30 years. Policy choices in recovery are as important as those made in the crisis Important though these considerations are, government policy has done a good job of mitigating the impacts of the pandemic downturn on income inequality. With vaccine rollout bringing the end of crisis into sight, we can expect the government to continue to spend whatever is needed to keep things on hold for just a little while longer and compensate those affected. But once the government starts to reanimate the economy, we cannot expect everything to reset overnight. Policy choices matter. The inevitable ending of the furlough scheme as we exit lockdown will likely unleash a wave of redundancies and labour market churn – pushing up unemployment and damaging incomes for many (even as GDP once again rises). The impact will hopefully be relatively mild and relatively brief, but it will nevertheless result in clear winners and losers. The UK’s policy response will therefore need to evolve. In navigating this shift, the government should be mindful of the need to support an equitable recovery. Higher income households exiting 2020 with swollen bank balances should find it somewhat easier to negotiate their way through a potentially bumpy 2021 than lower income households with their reduced savings and higher debts. Against this backdrop, April’s plans to remove the current £20 a week Universal Credit uplift from six million households look especially damaging. As the Health Foundation’s COVID-19 impact inquiry work is making clear, inequalities of all forms – economic and social – can reinforce each other to the detriment of the nation’s longer term health and wellbeing. The pandemic has exposed pre-existing inequalities and it has actively exacerbated many of them. It will be some time before we get the definitive data on its impact on income inequality, but there is every chance that we will find that it has been minimal – a welcome outcome. But it is one that should not be taken for granted: making the right policy choices is just as important in recovery as in crisis.