COVID-19 benefit policy may soon shift from cushioning income shocks to causing them, says Resolution Foundation

New report highlights that benefit support is due to be dramatically cut back in April 2021, at a time when the OBR projects the unemployment rate to still be in double-digits

COVID-19 benefit policy may soon shift from cushioning income shocks to causing them, the Resolution Foundation has said.

In a new report, Living Standards Audit 2020, the Resolution Foundation looks at recent trends in household incomes and presents an analysis of how the incomes of different groups have been affected during the height of the coronavirus lockdown.

However, also looking to the future, and the importance of maintaining the safety net to protect incomes against the effects of rising unemployment in the months ahead, the Resolution Foundation says that the phasing out of the Coronavirus Job Retention Scheme in autumn 2020 will be likely to mean that income losses will become more concentrated among those made unemployed.

While this will increase the relative importance of different forms of state support shifting towards the welfare benefits system, the Resolution Foundation notes that benefit support is currently expected to be dramatically cut back in April 2021. As a result, it says that, rather than cushioning income shocks, benefit policy would shift to causing them at a time when the Office for Budget Responsibility (OBR) projects the unemployment rate to still be in double-digits.

NB - changes in April 2021 include -

• an expected reduction in the basic level of universal credit and working tax credit, equivalent to an estimated 22 per cent cut in real terms for a single out-of-work adult aged over 24;
• an estimated average reduction of £700 in housing allowances for two-bedroom properties, for example, if local housing allowances become unmoored again from actual local housing costs; and
• the expiry of the £150 a year council tax reduction for poorer working-age households in England.

With an estimated 6 million households (containing 18 million people) expected to each lose more than £1,000 in 2021/2022 as a result of these three changes, the Resolution Foundation says that cutting back support in April 2021 would be the wrong thing to do, in terms of cushioning households in the continuing and shifting crisis; in terms of the fundamental long-term inadequacy of the benefits system; and in terms of macroeconomic policy.

Instead, the Resolution Foundation says that it believes that current circumstances point to the need for further increases in social security benefits, both to support lower-income households and to stimulate competition -

'As we have shown, public policy has played a very important role in propping up household incomes - particularly for lower income families – in the face of a huge economic blow. But the danger now is that those households face large income hits from unemployment and that policy reinforces, rather than ameliorates, that hit. This would leave us with a toxic combination of the pre-crisis trend of weakening support for low-income families and a very weak labour market. The clear task for policy now is to minimise unemployment and to boost, rather than cut, incomes for struggling households.'

For more information, see the Living Standards Audit 2020 from resolutionfoundation.org