Pandemic hits UK household finances harder than EU peers

UK households have suffered a bigger income shock during the Covid-19 crisis than their French and German counterparts, and are more likely to have run up debts, according to research highlighting the inadequacy of the UK’s welfare safety net.

Typical household income levels were similar in all three countries in the year before the pandemic, but higher levels of inequality meant that the poorest fifth of UK households entered the crisis in a weaker financial position, the Resolution Foundation think-tank said in a report published on Wednesday.

Average income in this bottom quintile stood at €14,700 in the UK, compared with €16,600 in Germany and €18,500 in France, and both the rate and level of savings was far lower in the UK.

The Resolution Foundation’s research, combining official data with a cross-country survey conducted in January and February, found that a larger share of UK households had suffered a fall in income over the past year, and that this was not only due to the greater length and stringency of the UK’s lockdowns.

Among those households where at least one person had become unemployed in the past year, 60 per cent recorded a fall in income in the UK, with 41 per cent losing more than a quarter of their income. In Germany, only 28 per cent of households that had lost work suffered such a severe income hit, while in France the proportion was just 20 per cent.

Dan Tomlinson, one of the report’s authors, said the research highlighted a “yawning gap” in the generosity of welfare systems, with the UK falling far short of adequate support for incomes.

In the UK, a single homeowner earning two-thirds of the median would receive benefits equal to 22 per cent of previous earnings after two months out of work — even after last year’s boost to the basic rate of universal credit. If the government allows this temporary uplift to expire as planned in the autumn, the replacement rate will be just 17 per cent.

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Someone aged 40 who had paid into Germany’s contributory benefits system would in contrast receive benefits equal to 59 per cent of previous earnings in similar circumstances, while in France’s contributory system the replacement rate would be 64 per cent.

Gaps in the generosity of welfare are much narrower for families, and when housing-related benefits for renters are included. Also, the UK compares better on other measures of economic insecurity.

France, for example, had a much lower pre-pandemic employment rate, along with high numbers of workers on temporary contracts and fewer childless couples where both were earning. In Germany, meanwhile, low income households faced relatively high costs for rented housing and were more likely to hold debt taken out to cover basic living expenses.

But the combination of greater labour market disruption, lower benefits payments and lower savings has made UK households more likely to rely on debt over the past year. Seventeen per cent of those suffering a fall in income said they had borrowed money to cover living expenses, around twice as high as in either France or Germany, and UK households were also much more likely to resort to short-term, high-interest loans that could compromise their ability to cope in future.

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