The Living Standards Audit 2020

21 July 2020

Daniel Tomlinson

Adam Corlett

Karl Handscomb

Charlie McCurdy

Mike Brewer

This report is the latest in a series of annual Living Standards Audits, highlighting recent trends in household incomes. This year’s report looks at how households were faring before the coronavirus crisis, but also presents our nowcast of how the incomes of different groups were affected during the height of the lockdown. We also look to the future, and discuss the importance of maintaining – and even improving – the safety net in order to protect incomes against the effects of rising unemployment in the months ahead.

Key findings

The context for this new crisis was over a decade of poor income growth. In addition to the effects of the financial crisis, there was zero growth in the typical working-age household income over 2017-18 and 2018-19, though we estimate a slight improvement in 2019-20.
The last few years have been particularly weak for low-income households, whose typical income actually fell in 2016-17 to 2018-19, and was no higher in 2018-19 than in 2001-02. This weakness, driven by a combination of high inflation post-referendum and the roll-out of cuts to working-age welfare, is an important backdrop to the current crisis.
The 2020s started off on a high, with the UK experiencing record employment levels and real pay growth. But, the coronavirus lockdown has hit living standards hard. We estimate that typical non-pensioner household incomes were 4.5 per cent lower in May 2020 than in 2019-20. In terms of immediate income shocks, this is on a par with the fall in household incomes recorded during the rampant inflation associated with the mid-1970s oil crisis.
The labour market impact of this crisis has fallen most heavily on low earners, but the £9 billion boost to welfare announced in March 2020, combined with the fact that many adults in low-income households do not do paid work, means that incomes in the bottom fifth of the non-pensioner distribution were close to unchanged in lockdown compared to 2019-20. We estimate that without the increased welfare boost they might have been at least 8 per cent lower in May 2020.
For many low-income families, the crisis has been accompanied by falling savings rates and a growing use of high-cost consumer debt, with one-in-four adults in the second poorest fifth of the income distribution reporting increased use of consumer debt.
For some people, temporary earnings reductions during lockdown will be followed by a return to full-paid work. But unemployment is becoming a huge concern, with the OBR projecting an unemployment rate of 11.9 per cent in Q4 2020. With Universal Credit being far less generous than the Job Retention Scheme, there will be further hits to household incomes for many, and those working in the sectors that are most at risk (e.g. hospitality and retail) are already disproportionately in lower-income households.
Given the immediate prospects for unemployment and household incomes, as well as the UK’s pre-crisis inequalities, it is of great concern that benefit support is set to be substantially reduced in April 2021. The planned return to pre-crisis levels of support in April will reduce disposable incomes by over £1,000 a year for over 6 million households, containing 18 million people; reducing the average income of the poorer half of the population by an estimated 4 per cent in 2021-22.

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