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2021 will “mark the peak of the pandemic-induced living standards downturn for households,” a new study has revealed, as it warned that a cut to Universal Credit (UC) would drive up relative poverty.
Think tank The Resolution Foundation said this downturn will be despite the fact that the economy is recovering thanks to the population gradually being vaccinated, and will have a particular impact on those with lower incomes.
Karl Handscomb, senior economist at the Resolution Foundation, noted that “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 ($1,354) if Universal Credit is cut.”
The foundation’s annual “Living Standards Outlook” examined the economic crisis and recovery through real household disposable incomes.
The report noted that despite the UK experiencing a huge economic contraction in 2020, many households have been protected from its impact by unprecedented government support, including the £63bn Job Retention Scheme and £6bn uplift to UC, a government payment to help with living costs, and Working Tax Credit, which is designed to top up earnings but which has been replaced by UC for many.
This support, combined with falling housing costs and low inflation, meant typical household incomes were flat in 2020, growing by just 0.1%.
This average change hid big losses for many families, such as those who have fallen through the gaps in government support.
However, the withdrawal of this support from spring 2021 onwards, along with rising unemployment, means that typical household incomes are on course to fall next year (2021-22) by around 0.4%.
In contrast, the Office for Budget Responsibility (OBR), a non-departmental public body, expects GDP to rise by 10.4%.
The Resolution Foundation noted that withdrawal of the £20 a week uplift to Universal Credit from April will lead to a tough 2021 for low-income households, who could see their real incomes fall by more than 4%, or by £600 to £12,800 for a household at the twentieth percentile.
The withdrawal of the UC 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, it warned
But the foundation notes that the outlook for living standards could improve by a faster recovery from the pandemic, and by keeping the boost to UC.
Its analysis shows that the OBR’s upside scenario, which includes a far smaller rise in unemployment in 2021-22 (to 4.7%, rather than 6.8%) would see typical incomes grow by 5.7%, rather than 3.5%.
Furthermore, maintaining the uplift to UC throughout the parliament would counteract the rise in child poverty, and ensure that incomes grew, it said.
“The living standards outlook for 2021 looks bleak at present – but the government can directly improve it,” said Handscomb.
“Deciding if the £20 a week uplift to Universal Credit should be extended will determine whether millions of households are able to enjoy any sort of living standards recovery next year,” he added.
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