Did the UK Policy Response to COVID-19 Protect Household Incomes?

Mike Brewer,Iva Tasseva

doi:10.2139/ssrn.3628464

Abstract

We analyse the UK policy response to Covid-19 and its impact on household incomes in the UK in April and May 2020, using microsimulation methods. We estimate that households will lose a substantial share of their net income (7% on average). As a proportion of income, the losses due to the crisis are largest for previously higher-income families. However, the overall impact of the crisis on income inequality is small. Earnings subsidies (the Coronavirus Job Retention Scheme) will protect household finances and provide the main insurance mechanism during the crisis. Besides subsidies, Covid-related increases to state benefits, as well as the automatic stabilisers in the tax and benefit system, will play an important role in mitigating the income losses. Analysing the impact of a near-decade of austerity on the UK safety net, we find that, compared to 2011 policies, the 2020 pre-Covid tax-benefit policies would have been less effective in insuring incomes against the shocks. The extra benefit spending in response to the pandemic will strengthen the safety net, providing important additional income protection.

Highlights

The UK has been one of the hardest hit countries in the world by the Covid-19 pandemic
To minimise the damage to families staying at home and the economy, the UK government designed at speed a large emergency package consisting of two brand-new programmes for employees, the Coronavirus Job Retention Scheme (CJRS), and for the self-employed, the Self-Employment Income Support Scheme (SEISS), as well as increasing the generosity of state benefits for low-income families (Universal Credit and other benefits)
It looks in more detail at the impact of the increase to state benefits announced by the government when the crisis hit, as well as at how effective the tax-benefit system would have been in responding to the economic shocks without these measures

Summary

Introduction

The UK has been one of the hardest hit countries in the world by the Covid-19 pandemic. To slow down the spread of the disease, the UK government introduced strict lockdown measures from 23 March 2020 until the end of May 2020 closing down economic sectors such as hospitality and non-essential retail and restricting severely people’s movements This sharp drop in activity meant that the UK has been among the most adversely-affected economically by the pandemic among OECD countries. This paper assesses the impact of the Covid-19 crisis and these emergency reforms on household incomes during the months of the strictest lockdown measures and the highest recorded drop in GDP since the start of the pandemic – April and May 2020 It aims to provide a better understanding of the distributional impact of the existing and new fiscal policies introduced by the government. We assess what would have been the distributional impact of the pandemic if a Universal Basic Income (UBI) was introduced in place of the Covid emergency measures

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Conclusion