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

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.

The COVID-19 Resilience of a Continental Welfare Regime - Nowcasting the Distributional Impact of the Crisis

“…Studies focusing on the impact of the Covid-19 pandemic on the distribution of household incomes are relatively scarce and cover only a limited number of countries. In what follows we reflect upon the role of tax-benefit systems and discretionary policy measures in cushioning income shocks in Luxembourg in comparison with the recent findings in Australia (Li et al, 2020b), Ireland (O'Donoghue et al, 2020, Italy (Figari and Fiorio, 2020) and the UK (Brewer and Gardiner, 2020;Brewer and Tasseva, 2020). These countries differ in their sectoral composition of the economy, welfare systems and specific policy measures introduced in response to the COVID-19 crisis.…”

“…Albeit they somewhat differ in terms of eligibility criteria, the replacement rates within these schemes are relatively high: 80% of the remuneration costs in Italy, Luxembourg, and the UK (subject to a maximum cap in all three countries), a maximum rate of €410 per qualifying employee per week in Ireland, a flat rate of €460 per week (A$750) in Australia. As shown by Brewer and Tasseva (2020), Figari and Fiorio (2020), Li et al (2020b), and, wage subsidies played a crucial role in mitigating market income losses in Australia, Ireland, Italy, and the UK at the onset of the COVID-19 crisis. Australia has also temporarily doubled the unemployment benefit amount and broadened the eligibility criteria, leading to a substantial increase in welfare expenditure.…”

“…As early research shows, the capacity of these welfare systems to cushion consequences of COVID-19 largely depend on their design. Brewer and Tasseva (2020), for example, show that UK automatic stabilizers have only a limited ability of cushioning income losses during a crisis, when a substantial portion of employees loses jobs or is forced to reduce the number of working hours. A similar finding is reported by Figari and Fiorio (2020), who conclude that the in-built features of the tax-benefit system in Italy were not sufficient to mitigate the economic shock induced by the COVID-19 crisis.…”

“…As a result, countries where such sectors are more prevalent experienced higher employment losses and drops in market incomes than their counterparts with smaller shares of these sectors. 1 To compensate (at least partially) for income losses, the governments of many countries introduced complementary income support programs, such as short-term unemployment schemes, special leave schemes, and direct cash payments (see, among other, Brewer and Tasseva, 2020;Figari and Fiorio, 2020;Li et al, 2020b;. While some countries had to introduce radically different policies from their existing systems (e.g.…”

“…Our paper contributes to an increasing literature on the economic consequences of the COVID-19 pandemic for the welfare of individuals and the households they live in. Among the studies on the distributional consequences of the crisis we mention Brewer and Gardiner (2020) and Brewer and Tasseva (2020) in the UK, Beirne et al (2020) and in Ireland, Figari and Fiorio (2020) in Italy, and Li et al (2020b) in Australia. In Italy and the UK, despite the presence of automatic stabilizers and the introduction of new policy instruments, the findings document an increase in inequality in household disposable incomes during the first months of the COVID-19 outbreak.…”