Tackling child poverty - progress report 2022 to 2023: annex d - cost of living focus report

Impact of, and lessons from, recent economic crises

Key Messages

The austerity welfare reforms have shrunk the safety net available to those requiring support from the state. Austerity measures worsened standards of living, particularly for those in low income households.

Throughout the various economic crises, in-work poverty has risen and employment has increasingly proven not to be a reliable route out of poverty.

Temporary support packages introduced during the pandemic, such as the Job Retention Scheme (Furlough) and the £20 Universal Credit uplift, prevented widespread hardship. Policy packages that respond to specific crises and circumstances do work.

The ongoing cost of living crisis arose through a range of different significant events, including: the COVID-19 pandemic, the war in Ukraine and Brexit.

This section of the report looks at the policies put in place to overcome recent economic crises and summarises evidence of impact on societal standards. Specifically, the report covers the 2008 financial crisis and the global COVID-19 pandemic.

The aim of this chapter is twofold. First, to uncover learnings around what works and what does not for families living in low income households that are of relevance to the current crisis. Second, this section also provides an understanding of the starting position of families in low income households at the outset of the cost of living crisis.

Context

The current cost of living crisis is the latest development in a period of economic instability and underperformance for the UK stretching back well over a decade to the 2008 financial crisis.

In response to the 2008 market crash, and the subsequent recession, the Coalition and Conservative governments, from 2010 onwards, pursued a policy programme of austerity measures. Austerity measures meant spending cuts to social security and public services.

The year 2020 saw the onset of the COVID-19 pandemic. This marked a definitive shift away from austerity as whole sectors of the economy shut down and government spending dramatically increased to support business and families and minimise adverse impacts of the pandemic. National lockdown measures (periods when stay at home regulations were in place) had barely ended when inflation began to increase sharply in late 2021, with the Consumer Price Index rising to 11.1% (annual rate) by October 2022. At the time of writing this report, inflation is at 8.7%,^[5] though the OBR forecasts it will fall to 2.9% by the end of 2023.^[6]

A summary of policy actions during recent crises with a review of evidence on impact follows.

Austerity policies following the 2008 financial crisis

From 2010, the UK coalition Government adopted a deficit reduction policy. This aimed to offset increases in government spending which had been implemented in response to the 2008 financial crisis by the previous Labour administration.^[7]

The main agenda was to reduce spend at all levels. This is what was referred to as 'austerity measures'. These included a number of welfare reforms, the overall effect of which was to limit the amount of support available to families through benefits and tax credits. Indeed, analysis using the House of Commons Library Welfare Expenditure and Savings Tool highlights how in 2016-2017 the Government was due to save approximately £26 billion from cuts to welfare spending.^[8]

Key changes since 2010 include:

• A benefit cap restricting the maximum amount of support a family could receive. In 2013, this measure introduced a cap at £500 per week for a family and £350 per week for a single person with no children.^[9]
• A freeze in the rate of most working-age benefits. For a four year period (2015/16-2019/20) the majority of working-age benefits were kept at their 2015-16 cash value. This followed a previous three year period (2013/14-2015/16) where increases were limited to 1% per annum. This means benefits did not keep up with the rate of inflation. Benefits and tax credits were 6% lower in 2020-2021 than if the CPI rate had been applied during the four years of the freeze.^[10]
• A two-child limit for child tax credit and Universal Credit (UC). From April 2017, means-tested family benefits were restricted to two children. This meant child tax credits were not payable for third or subsequent children born after 6 April 2017.^[11]
• The abolition of the 'family element' of Working Tax Credit (WTC) and equivalent in UC. This measure, introduced in April 2012, meant couples with children were required to work at least 24 hours per week to qualify for WTC. Prior to this, the minimum hours per week for qualification was 16 hours.^[12],[13]
• In addition, cuts to local authority budgets meant that some frontline services either closed, or were under-resourced and less able to meet demand.

In Scotland, compared to England, cuts to public services were less severe. The Scottish Government maintained the aim of reducing inequalities, basing policy and wider decisions on four pillars: prevention, partnership, people, and performance.^[14] For example, the impact of 'the removal of the Spare Room Subsidy', commonly known as the 'bedroom tax',^[15] has been offset by the Scottish Government's Discretionary Housing Payments.^[16] The Scottish Government also aimed to buffer local authorities from the full extent of the cuts to funding.^[17] However, local authority spending still reduced in Scotland in real terms by 11% between 2010-2011 and 2014-2015. In comparison, spending in England during this same time period fell by 27%.^[18]

What was the impact of austerity on low income families?

A wide range of evidence has shown the negative impact of austerity measures on living standards. A number of trends, coinciding with the period of austerity, indicate a worsening of people's financial circumstances. Since around 2010, child poverty rates have been generally stable.^[19] However, there has been an increase in the depth of poverty experienced^[20] and the incidence of poverty in working households remains a growing issue.^[21] Data from the Trussell Trust records an increased demand since 2011 for food banks across the whole UK, including parcels distributed to children.^[22] In Scotland, applications to the Scottish Welfare Fund 'crisis grants' have risen steadily since 2013, with the most commonly reported reason being running out of money or benefits.^[23]

Furthermore, in 2019, the UN's special rapporteur on extreme poverty and human rights published a report which criticised the government's policies for entrenching poverty in the UK.^[24] The report concluded that the UK government's welfare reforms "have made it much harder for people to make ends meet and stymied progress in reducing poverty." The report also concluded that employment, alone, was not sufficient in lifting people out of poverty, citing the persistence of poverty despite a high rate of employment. The report states that, across the UK, a reduction in in-work benefits and rising housing costs have contributed to the higher rate of in-work poverty.

Analysis by the Equality and Human Rights Commission^[25] shows that the cumulative effect of welfare and tax reforms from 2010 to 2018 have had the greatest impact on the poorest households. It estimates that people in the lowest two income deciles will have lost around 10% of their net income, with comparatively small losses for those with higher incomes.

Lessons learned

There were some key learnings across the evidence concerning the impact of austerity, particularly on low income households:

• Austerity policies did not protect from, and even contributed to, the rise in public sector unemployment and poor pay from the economic recession. This has been linked to poorer health and mental wellbeing outcomes.^[26]
• Reductions in incomes due to austerity measures, coinciding with rising food prices, led to income insufficiency and there is a clear relationship between austerity welfare reform and food insecurity.^[27]
• Austerity measures impacted most those already vulnerable (e.g. those living on the lowest incomes, in precarious employment, or with health conditions), and widened inequality. Evidence highlighted the need for a strong and robust welfare system to protect families living in these circumstances.^{[26],[28],[29]}
• Austerity measures eroded attempts to reduce child poverty.^[30]

COVID-19 pandemic

Following the outbreak of the COVID-19 pandemic in early 2020, the UK observed three periods of lockdown (periods when stay at home regulations were in place) and other varying restrictions which limited social and economic activity. With the exception of key workers, that is those providing essential services for the functioning of society,^[31] people were asked to work from home and many non-essential services were shut down. The health crisis and the lockdown policies in response moved the economy into a recession.

In response, the UK and Scottish Governments developed packages of social and economic support. In March 2020, the UK Government announced the Coronavirus Job Retention Scheme, also known as the Furlough Scheme, in order to limit expected rises in unemployment. It encouraged businesses to retain employees through government subsidising wages of staff unable to work as many hours as pre-pandemic or at all. Furlough officially closed at the end of September 2021.^[32] Another policy was the £20-a-week uplift to Universal Credit, which was also withdrawn in the Autumn of 2021.

What are the known impacts of the pandemic so far on low income families?

The pandemic had a profound impact on society as a whole. However, there are certain groups within society who have borne the brunt of the impact.

Mixing with other people was heavily restricted and most people were stopped from working for at least some of this period. School closures meant that childcare responsibilities increased for parents who were also expected to provide 'home-learning' support. Evidence indicates that the mental health impacts of the pandemic were particularly acute for families with dependent children. Disrupted routines, changed roles and responsibilities, and reduced support from friends and family contributed to stress and exhaustion.^[33]

Families on lower incomes spend a greater proportion of that income on essentials such as food and fuel. Long periods at home meant the costs of heating the home, running appliances and providing food for household members increased.^[34] These additional costs were felt most acutely for people already operating on tight household budgets.

The isolation and stress of being locked down may also have been exacerbated by the living conditions of those on lower incomes, who are likelier to live in crowded accommodation, poor housing conditions, or have no access to outdoor space.^[34]

COVID restrictions also meant that a significant proportion of the economy was also, effectively, locked down, with many people being furloughed, experiencing losses in their working hours, or losing their jobs altogether. Analysis shows that lower-paid workers, as well as those in non-standard work arrangements, were disproportionately affected by these developments, and likelier to lose out on earnings.^[35],[36] Although the job retention scheme prevented large scale job losses, government support only covered 80% of pay (initially). So, the reduction in income will have been felt most keenly by those on lower wages. People on temporary contracts or doing agency work were much more likely to lose their job altogether, while people who had lost a job just before the pandemic struggled to find re-employment. Certain sectors of the economy were more vulnerable, particularly those involving jobs that could not be undertaken remotely. This generally affected lower-paid industries such as retail and hospitality.^[37]

Lessons learned

Evidence is constantly evolving, however, from the evidence reviewed, there are some learnings worth highlighting.

Government support was necessary and helpful. Job losses and reduced earnings increased the poverty risk for people living in working households prior to the pandemic. Despite reducing incomes, the Government's Furlough Scheme was viewed positively^[38],[39] and protected millions of jobs – with an estimated 87% of furloughed workers able to return to work when the scheme ended.^[40]

Social security was fundamental for minimising poverty. Some evidence indicates that increased social security spending may have, in the short-term at least, lifted some non-working households out of poverty, whilst the temporary uplift (since removed) to UC protected others from falling into poverty.^[34] Further, COVID-related payments also played an important role in helping households to manage with the challenges of the pandemic.^[38]

Local emergency response efforts have been recognised as particularly effective during the pandemic, with cross sector partnerships forming to fund and provide emergency interventions. Some organisational staff involved in front-line delivery reported that, in response to the unprecedented crisis, there was more flexibility in the approaches of statutory bodies and service organisations. There was, however, a feeling that these ways of working were receding as restrictions lifted.^[41] Scottish Government research evaluating COVID support in low income households found schools, nurseries and food banks were often gateways to provision of support and advice in relation to financial concerns.^[38]

Impact on wellbeing has been acute. Further, it is well-established the negative impact COVID-19 has had on mental health and well-being – both directly and indirectly^[42] – with those in lower income households often reporting lower levels of mental wellbeing during the pandemic.^[43]

Conclusion

The experiences of the 2008 financial crisis and austerity response and the COVID-19 pandemic provide useful insights to understanding today's crisis.

Crucially, economic disruption tends to hurt those on the lowest incomes most. This goes beyond losses in income, and can carry over into mental wellbeing, health, and other outcomes with long-term consequences. Fast and significant policy responses can help respond to the economic shock and partially shield those most vulnerable.

But these crises do not only offer useful lessons, their influence continues to be felt today and is relevant context to the development and impact of the cost of living crisis.

It is important to consider the compounding nature of crises when we focus on the impacts of the past 15 years and how this plays out during the current crisis.