Planned benefit cuts will leave low-income households more exposed to the next recession

By Nuffield Foundation

New IFS research published today, funded by the Nuffield Foundation, looks at recessions, inequality, and the role of the tax and benefit system. It finds that planned benefit cuts will leave low-income households more exposed to the impact of future recessions.

If the falls in the earnings of workers seen between 2007–08 and 2011–12 happened again now, the poorest 30% of working-age households would see their after-tax incomes fall by an average of only 39p for every £1 fall in pre-tax earnings. This is because of the offsetting impact of lower direct taxes and higher benefits. But when benefit cuts currently being rolled out are fully in place, that figure rises to 53p for every £1. Some working households currently receiving in-work benefits will no longer be entitled, and so won’t see their benefits rise as soon as their earnings fall. Some of those who are still entitled will see benefits rise less when earnings fall.

This matters. The Office for Budget Responsibility puts the chances of a recession in any five-year period at 50:50. Economic uncertainty is currently high. When the next recession does hit, the tax and benefit system will offer less support to low-income households.

The government is in the process of implementing a number of significant cuts to means-tested working-age benefits. The biggest are a cash freeze in most working-age benefits, cuts to child tax credit, and the introduction of the less generous universal credit. These cuts make low-income households worse off, while reducing benefit spending and, potentially, strengthening work incentives. But another part of this story is that these benefit cuts mean the government will, by default, provide less insurance to households in the event that their earnings fall.

Other key findings include:

  • In-work benefits for low-income households were a key reason inequality fell during the Great Recession. Absent any changes to the tax and benefit system, the net incomes of the lowest-income working households would have fallen by less than 5% between 2007–08 and 2011–12, despite falls in household pre-tax earnings of more than 10%. In fact, the incomes of the lowest-income households actually rose, thanks to increases in the generosity of some benefits (most significantly, child tax credit).
  • The differences in the impact of past recessions on inequality are largely explained by differences in the labour market impacts: the big rise in unemployment during the early 1980s increased inequality, while the sharp falls in earnings during the Great Recession acted to reduce inequality.
  • If hit by a recession whose effects were concentrated on employment rather than pay – as was typical until the last recession – the current and planned future tax and benefit system would provide less insurance to households on average than systems we had in the past. If the employment falls seen in the early 1980s reoccurred today, 55% of the total impact on pre-tax earnings would be passed through to net household incomes (with 45% borne by the public finances through lower taxes and higher benefits). Under the tax and benefit system in place back then, the split would be 50:50. The main explanation is that out-of-work benefits are a smaller fraction of earnings than they were back then.

Andrew Hood, a Senior Research Economist at IFS and an author of the report, said:

“When governments change the tax and benefit system they should consider the impact on the support the system will provide to households when the next recession hits. Planned cuts to working-age benefits will leave low-income households with children in particular more exposed to any future downturn in the labour market, by reducing the extent to which earnings losses would be offset by increased entitlement to benefits. This is particularly important since many in this group have little or no savings which they can draw on during a period of temporary difficulty.”

Related


Explore our projects

Older-man-reads-textbook-Assembling-data-jigsaw-Greater-Manchester-PROJ
In progress

Welfare | 2020 - 2024

Assembling the data jigsaw: powering robust population research in MSK disease

View project
Medical-professional-massages-patient-knee-Understanding-joint-replacement-surgery-decision-making-for-older-patients-PROJ
In progress

Welfare | 2020 - 2023

Supporting older patients to make informed decisions about knee surgery

View project
Woman-medical-professional-treats-patient-impact-MSK-conditions-outcomes-other-illnesses-PROJ
In progress

Welfare | 2020 - 2022

The impact of musculoskeletal conditions on outcomes of other illnesses

View project
Female-nurse-sees-patient-in-office-Integrating-enriched-longitudinal-data-North-Staffordshire-Stoke-on-Trent-PROJ
In progress

Welfare | 2020 - 2025

Enriched data integration for population musculoskeletal health intelligence

View project
Older-man-and-woman-walk-together-Geographical-mapping-prevalence-outcomes-MSK-conditions-Wales-Scotland-PROJ
In progress

Welfare | 2020 - 2022

Mapping rheumatic and musculoskeletal disease in Scotland and Wales

View project
In progress

Welfare | 2020 - 2022

Older people in England: the geography of challenges and opportunities

View project
Senior-woman-enjoys-video-call-on-smartphone-Social-cohesion-in-context-of-COVID-19-PROJ
In progress

Welfare | 2020 - 2021

Social cohesion in the context of COVID-19

View project
Toddler-gleefully-eats-baked-beans-How-COVID-19-is-affecting-food-security-proj
New

Welfare | 2020 - 2021

How the COVID-19 crisis is affecting food security

View project
In progress

Welfare | 2020 - 2022

Vulnerability, migration and well-being: experiences, perceptions and barriers

View project
Woman-looks-at-smartphone-screen-How-the-UK-public-gets-information-about-COVID-19-PROJ
In progress

Welfare | 2020 - 2020

How the UK public gets information about COVID-19

View project
In progress

Welfare | 2020 - 2021

COVID realities: families on low incomes during the pandemic

View project
In progress

Welfare | 2020 - 2022

COVID-19 social study

View project
In progress

Welfare | 2020 - 2022

Vulnerability, migration and well-being: experiences, perceptions and barriers

View project
Toddler-gleefully-eats-baked-beans-How-COVID-19-is-affecting-food-security-proj
New

Welfare | 2020 - 2021

How the COVID-19 crisis is affecting food security

View project
In progress

Welfare | 2020 - 2022

Older people in England: the geography of challenges and opportunities

View project
Senior-woman-enjoys-video-call-on-smartphone-Social-cohesion-in-context-of-COVID-19-PROJ
In progress

Welfare | 2020 - 2021

Social cohesion in the context of COVID-19

View project
Teenage-girl-looks-at-smartphone-next-to-laptop-Growing-up-under-COVID-19-PROJ
In progress

Education | Welfare | 2020 - 2021

Growing up under COVID-19

View project
In progress

Welfare | 2020 - 2022

COVID-19 social study

View project
In progress

Welfare | 2020 - 2021

COVID realities: families on low incomes during the pandemic

View project
Woman-looks-at-smartphone-screen-How-the-UK-public-gets-information-about-COVID-19-PROJ
In progress

Welfare | 2020 - 2020

How the UK public gets information about COVID-19

View project
Woman-medical-professional-treats-patient-impact-MSK-conditions-outcomes-other-illnesses-PROJ
In progress

Welfare | 2020 - 2022

The impact of musculoskeletal conditions on outcomes of other illnesses

View project
Man-massages-own-hand-Longitudinal-evidence-how-arthritis-affects-earnings-PROJ
In progress

Welfare | 2020 - 2022

How arthritis affects earnings over time

View project
Medical-professional-massages-patient-knee-Understanding-joint-replacement-surgery-decision-making-for-older-patients-PROJ
In progress

Welfare | 2020 - 2023

Supporting older patients to make informed decisions about knee surgery

View project
Older-man-and-woman-walk-together-Geographical-mapping-prevalence-outcomes-MSK-conditions-Wales-Scotland-PROJ
In progress

Welfare | 2020 - 2022

Mapping rheumatic and musculoskeletal disease in Scotland and Wales

View project
Medical-professional-massages-patient-knee-Understanding-joint-replacement-surgery-decision-making-for-older-patients-PROJ
In progress

Welfare | 2020 - 2023

Supporting older patients to make informed decisions about knee surgery

View project
Older-man-reads-textbook-Assembling-data-jigsaw-Greater-Manchester-PROJ
In progress

Welfare | 2020 - 2024

Assembling the data jigsaw: powering robust population research in MSK disease

View project
Woman-medical-professional-treats-patient-impact-MSK-conditions-outcomes-other-illnesses-PROJ
In progress

Welfare | 2020 - 2022

The impact of musculoskeletal conditions on outcomes of other illnesses

View project
Female-nurse-sees-patient-in-office-Integrating-enriched-longitudinal-data-North-Staffordshire-Stoke-on-Trent-PROJ
In progress

Welfare | 2020 - 2025

Enriched data integration for population musculoskeletal health intelligence

View project
Older-man-and-woman-walk-together-Geographical-mapping-prevalence-outcomes-MSK-conditions-Wales-Scotland-PROJ
In progress

Welfare | 2020 - 2022

Mapping rheumatic and musculoskeletal disease in Scotland and Wales

View project
In progress

Welfare | 2020 - 2022

Older people in England: the geography of challenges and opportunities

View project
In progress

Welfare | 2020 - 2022

Vulnerability, migration and well-being: experiences, perceptions and barriers

View project
Toddler-gleefully-eats-baked-beans-How-COVID-19-is-affecting-food-security-proj
New

Welfare | 2020 - 2021

How the COVID-19 crisis is affecting food security

View project
Senior-woman-enjoys-video-call-on-smartphone-Social-cohesion-in-context-of-COVID-19-PROJ
In progress

Welfare | 2020 - 2021

Social cohesion in the context of COVID-19

View project
Woman-looks-at-smartphone-screen-How-the-UK-public-gets-information-about-COVID-19-PROJ
In progress

Welfare | 2020 - 2020

How the UK public gets information about COVID-19

View project
In progress

Welfare | 2020 - 2021

COVID realities: families on low incomes during the pandemic

View project
In progress

Welfare | 2020 - 2022

COVID-19 social study

View project
Reported

Welfare | 2019 - 2020

Valuing data: foundations for data policy

View project
Reported

Welfare | 2019 - 2020

Revaluation and reform: bringing council tax into the 21st century

View project
Reported

Welfare | 2018 - 2019

Atlas of inequality: understanding the local nature of a global phenomenon

View project
Reported

Welfare | 2018 - 2020

The intergenerational transmission of family wealth

View project
Reported

Welfare | 2018 - 2018

Interdisciplinary conference on evidence use in policy

View project
Reported

Welfare | 2018 - 2019

Overview of the major ethical issues arising from data, algorithms and AI

View project
Reported

Welfare | 2018 - 2018

Council tax support schemes’ impact on claimants & local authorities

View project
Reported

Welfare | 2018 - 2018

Improving survey representation of non-resident parents

View project
Reported

Justice | Welfare | 2018 - 2019

Pathways of incarcerated children in care

View project
Reported

Justice | Welfare | 2017 - 2018

Visualising data in care proceedings

View project
Reported

Justice | Welfare | 2017 - 2018

Addressing the ‘care cases’ crisis: a sector-led review

View project
Reported

Welfare | 2017 - 2018

Vulnerable migrants and well-being: A pilot study

View project
Search projects

We improve people’s lives by funding research that informs social policy, primarily in Education, Welfare and Justice. We also fund student programmes that give young people skills and confidence in science and research.

We offer our grant-holders the freedom to frame questions and enable new thinking. Our research must stand up to rigorous academic scrutiny, but we understand that to be successful in effecting change, it also needs to be relevant to people’s experience.

Profile

COVID-19 response

Nuffield-funded social scientists are conducting COVID-19 research in real-time, to capture people’s experiences of the social, cultural and economic impacts of the pandemic.