Real Covid-19 hit to household income is still to come

Cut government support to play a major part, think tank says.

Households are being warned to brace for hits to living standards as the economic impact of coronavirus will peak this year.

The withdrawal of government support this spring will reveal the true, worsened state of home budgets, according to research from social policy think tank Resolution Foundation.

This will especially affect those already struggling financially and many typical households, too.

Britain suffered a huge economic contraction in 2020, but many households have been protected from its impact by government support – including the £63 billion Job Retention Scheme and £6 billion uplift to Universal Credit (UC) and Working Tax Credit.

Combined with falling housing costs and low inflation this has meant typical household incomes were flat in 2020, growing by just 0.1%. But worse is forecast.

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The Resolution Foundation’s Living Standards Outlook suggests as safety nets are pulled away from April more households will suffer the real impact of big losses to their income and savings.

The withdrawal of this support from this spring, along with rising unemployment, means typical household incomes are on course to fall in 2021-22 by around 0.4%. 

This is despite Office for Budget Responsibility forecasts that GDP will rise by 10.4%, which suggests such a broad measure of growth can hide household-level problems.

Karl Handscomb, senior economist at the Resolution Foundation, said: “Last year, unprecedented government support largely protected family incomes from the biggest economic contraction in over 300 years.

“But while the economic outlook for this year is far rosier, the living standards hit from the Covid-19 crisis is ahead, rather than behind us. Unemployment is set to rise, and over six million households are on course to lose over £1,000 if Universal Credit is cut.”

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According to the Resolution Foundation report, the withdrawal of the £20 a week uplift to Universal Credit from April will lead to a particularly tough 2021 for low-income households. These could see their real incomes fall by more than 4%, or by £600 to £12,800 for the poorest households.

The Foundation’s analysis points to a weak period of income growth for typical households, and an even bleaker outlook for low-income households.

The withdrawal of the Universal Credit uplift would drive up relative poverty from its current estimated level of 21% to 23% by 2024-25, while a further 820,000 children would fall into poverty.