UK HOUSEHOLDS ARE FAR MORE LIKELY to have experienced a severe income shock during the Covid-19 crisis than their French and German counterparts, and are more likely to have taken on additional debt in response, according to a new report published this week by the Resolution Foundation.

The report After Shocks is the first major cross-country comparison of the financial resilience of households across the UK, France and Germany on the eve of the pandemic, and how they have coped with the crisis over the past year.

Typical household incomes across all three countries were broadly similar in the year before the pandemic (€33,800 in France, €33,900 in the UK and €34,400 in Germany).

However, big differences in households’ financial positions lie beneath these similar income levels. On the eve of the crisis, higher inequality meant that the UK’s poorest households had lower incomes (20 per cent lower than those in France), while its social security and private savings safety nets were far weaker than in France and Germany.

The weaker social security safety net has meant that while UK respondent households are just as likely to have experienced a negative employment change as French households during the crisis (38 and 39 per cent of households who were in work in February 2020 respectively, compared to 27 per cent in Germany), they have experienced a far bigger living standards hit than their European counterparts.

The report finds that among households in which at least one person has fallen out of work, over two-in-five (41 per cent) UK households have suffered a severe income fall (of at least 25 per cent) – twice the level in France (20 per cent) and significantly higher than in Germany (28 per cent).

Faced with the economic shock from the Covid-19 pandemic, one-in-three (33 per cent) UK households have cut back their spending – a far higher proportion than in France (23 per cent) and Germany (21 per cent).

This big spending fall in the UK is likely to be due in part to households experiencing bigger income losses and having fewer savings. But even more important is the fact that the UK has faced economic restrictions that have been tighter and longer lasting, says the Foundation.

Income shocks have fed through into wider financial challenges. The report finds that among households who have taken an income hit during the crisis, UK households are more likely to have struggled to meet their housing costs than those in France and Germany (50 per cent compared with 43 per cent and 44 per cent respectively).

UK households with an income hit are also twice as likely to have taken on more debt during the pandemic in order to cover living expenses than German and French households (with the proportion of households doing so at 17, 9 and 8 per cent respectively).

The Foundation notes that with the UK’s vaccine roll-out more advanced than in France and Germany, the end of the Covid-19 crisis for households looks closer in the UK than elsewhere in Europe.

However, this encouraging outlook should not distract policy makers from UK households’ relatively weak financial resilience – which has left them much more exposed to the economic crisis than their French and German counterparts.

The Foundation says that the uneven impact of the pandemic on household finances is likely to last far longer than the pandemic itself – with a greater proportion of the lowest-income households drawing on savings or taking on debt to support living standards compared to the highest-income households (a 17 percentage point difference in the UK and Germany, and a 10 percentage point difference in France).

The Foundation adds that strengthening households’ financial position, particularly among low-income households, through higher savings, less reliance on debt and a benefit system providing more income protection if they fall on hard times, should be a priority as we emerge out of the current crisis.

Maja Gustafsson, Economist at the Resolution Foundation, said: “Typical households across the UK, France and Germany had broadly the same income levels on the eve of the Covid-19 crisis. But beneath this similarity lie big differences in households’ financial resilience, with UK households having fewer savings to draw down, and a far less generous benefit system to protect them in hard times.

“These holes in UK households’ financial resilience have been exposed during the Covid-19 crisis. They are far more likely to have suffered a major living standards hit than French and German households, and are far more likely to have taken on debt to cope with these financial shocks.

“It’s vital that households’ financial position is strengthened as we finally emerge out of the Covid-19 crisis, so that they are less exposed when the next economic crisis comes along.”

* Read After Shocks here.

* Source: Resolution Foundation