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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 lost a substantial share of their net income of 6.9% on average. But policies protected household incomes to a substantial degree: compared to the drop in net income, GDP per capita fell by 18.9% between the first and second quarter of 2020. Earnings subsidies (the Coronavirus Job Retention Scheme) protected household finances and provided 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, played an important role in mitigating the income losses. However, 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. We also assess the potential distributional impact of introducing a Universal Basic Income (UBI) instead of the Covid emergency measures and find that a UBI would have supported the incomes of different vulnerable groups but would have provided less protection to those hit hardest by the labour market shocks.

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Acknowledgements

We are grateful to Holly Sutherland, Tom Lee, the editor and anonymous reviewers for insightful comments and suggestions. The results presented here are based on UKMOD version A1.6. UKMOD is maintained, developed and managed by the Institute for Social and Economic Research (ISER) at the University of Essex and we are indebted to Holly Sutherland, Paola De Agostini and the many others who have contributed to its development. The process of extending and updating UKMOD is financially supported by the Nuffield Foundation, based on the annual update of the UK component of EUROMOD funded by the European Union Programme for Employment and Social Innovation “EaSI” (2014-2020). We make use of micro-data from the Family Resources Survey made available by the Department of Work and Pensions and Understanding Society COVID-19 Study by ISER, University of Essex via the UK Data Service. The results and their interpretation are our own responsibility.

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Correspondence to Iva Valentinova Tasseva.

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Brewer, M., Tasseva, I.V. Did the UK policy response to Covid-19 protect household incomes?. J Econ Inequal 19, 433–458 (2021). https://doi.org/10.1007/s10888-021-09491-w

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  • DOI: https://doi.org/10.1007/s10888-021-09491-w

Keywords

  • Covid-19
  • Earnings subsidies and tax-benefit policies
  • Income distribution

JEL codes

  • D31
  • E24
  • H24