Coronavirus is hitting households hard. Through redundancies, income cuts and reductions in working hours, businesses are trying to reduce wage costs in order to preserve their cash flow, causing significant damage to the labour market.
Cebr has estimated the total impact that households will see on their disposable incomes (i.e. income adjusted for taxes and benefits) and found that there will be a 17% reduction in the earnings households have available for spending in Q2 2020 as a result of changes in the labour market.
There are several impacts that feed into this headline number. Firstly, many people are becoming unemployed. Since the beginning of the lockdown, thousands have lost their main source of income, with data from the Department for Work and Pensions showing that there were 950,000 universal credit applications between 16th and 31st March, nearly 10 times more than in a typical two-week period. The Office for Budget Responsibility estimates that job losses could reach up to 2.1 million in the second quarter, the majority of which will be among lower paid workers. We have therefore assumed that the largest part of the increase in unemployment will be observed at the lower end of the wage spectrum. Benefits claims will replace some of the lost disposable income, but not all of it, leaving UK households £1.5 billion out of pocket per month.
Without the government’s furlough scheme, the cost to households of coronavirus would easily be double what we have estimated. Research [1] suggests that the amount to be paid out through the scheme could reach £40 billion, due to one in three private sector workers being furloughed. The impact of the furlough scheme on incomes varies depending on what is agreed between employers and employees, but in the majority of cases workers will see at least a 20% fall in their gross earning. So even though the scheme will save many from redundancy, there will still be a sizeable hit to disposable incomes, which we estimate to stand at £3.9 billion per month.
Self-employed people are also seeing incomes fall. Many are now unable to work as demand for their goods and services has reduced or even disappeared entirely. The government will provide grants worth 80% of trading profits up to a maximum of £2,500 a month in June, but self-employed people will have to survive on savings, loans or benefits until then, significantly affecting household finances and adding a further hit of £3.5 billion to disposable incomes per month.
The nearly 4 million workers in the UK on flexible hours or zero-hours contracts have also inevitably been hit by this crisis, as it is easy for companies to reduce costs by scaling back their hours. Analysis [2] has shown that people with variable hours expect to earn only 59% of their usual income as a result of the coronavirus shutdown.
Lastly, many companies are keeping workers on by asking them to accept wage cuts. Major employers including Heathrow Airport and Grant Thornton have reported asking staff to accept pay cuts of up to 40% while coronavirus is impacting their business. In total, wage reductions and scaling back of working hours for people with variable hours contracts are estimated to result in a further £5.3 billion monthly hit to households’ disposable incomes.
Summing these effects up shows a monthly fall of £14.2 billion in UK disposable incomes at the nadir of the crisis, equivalent to a quarterly reduction of £42.7 billion. This means a reduction in money available for essential spending of 17% or around £515 per household per month during the lockdown.
It is worthwhile mentioning that while younger people will be disproportionately affected by job losses and the associated reductions in incomes, the crisis has also had a considerable negative effect on the savings of the older generations. In particular those without defined benefit pensions schemes will have seen a fall in the value of their pension pots during the crisis, which will lead to an additional reduction in consumer spending as long as asset prices remain depressed.
The unprecedented scale of the crisis has led to an equally unparalleled response by governments and central banks around the world. The UK has an established welfare state and a government prepared to take on vast amounts of debt to ensure that there is an economy which workers can return to when the shutdown ends. Nevertheless, the economic consequences of the great shutdown will be painfully felt by UK households in the coming months. Therefore, a policy response to put cash into people’s pockets when the lockdown ends will be important to kick-start the economy. A temporary reduction in VAT, or stamp duty exemptions are policies that the government should be considering implementing at the end of the lockdown, to restart spending at the end of the crisis.
[1] https://www.bbc.co.uk/news/business-52209790
For more information, please contact:
Josie Dent +44 207 324 2864