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

New

Welfare | 2024 - 2027

Gypsy, Roma, Traveller Youth: mitigating exclusions using the digital?

View project
A front view of a father and his two children. He is carrying his young son in his arms and his daughter is riding her scooter along the footpath as he pushes his son's scooter along the way.
New

Justice | Welfare | 2024 - 2026

Challenging justice inequalities with children in conflict with the law 

View project
New

Education | 2024 - 2026

Long-term outcomes of high-achieving disadvantaged children

View project
New

Education | 2024 - 2026

Exploring academic selection and grammar schools in Northern Ireland

View project
New

Welfare | 2024 - 2027

Performance Tracker 

View project
Mother wearing hijab holding her toddler son on her knee, smiling at each other
New

Welfare | 2024 - 2025

Afghan resettlement in England: outcomes and experiences 

View project
A woman is sat on the edge of a bed staring at her phone while her daughter is in the background.
In progress

Welfare | 2023 - 2025

Virtual parent support portals: a new research and practice agenda

View project
A middle-aged man sat at home is looking at this phone while sorting pension paperwork.
New

Welfare | 2023 - 2025

Collective defined contribution pensions with investment choice

View project
three women walking along street laughing and smiling
New

Welfare | 2023 - 2025

Revealing social capital

View project
New

Welfare | 2023 - 2026

Universal Credit, good work and progression

View project
Sixth form student smiling in a classroom while a teacher helps a classmate in the row behind him

Education | 2023 - 2025

Unequal access to higher learning: can the EPQ help with levelling up?

View project
Three colleagues smiling and talking at work
New

Welfare | 2023 - 2026

Arthritis, work and wellbeing: a mixed methods study with policy recommendations

View project
A front view of a father and his two children. He is carrying his young son in his arms and his daughter is riding her scooter along the footpath as he pushes his son's scooter along the way.
New

Justice | Welfare | 2024 - 2026

Challenging justice inequalities with children in conflict with the law 

View project
New

Welfare | 2024 - 2027

Gypsy, Roma, Traveller Youth: mitigating exclusions using the digital?

View project
New

Welfare | 2024 - 2027

Performance Tracker 

View project
Mother wearing hijab holding her toddler son on her knee, smiling at each other
New

Welfare | 2024 - 2025

Afghan resettlement in England: outcomes and experiences 

View project
three women walking along street laughing and smiling
New

Welfare | 2023 - 2025

Revealing social capital

View project
New

Education | 2024 - 2026

Exploring academic selection and grammar schools in Northern Ireland

View project
A middle-aged man sat at home is looking at this phone while sorting pension paperwork.
New

Welfare | 2023 - 2025

Collective defined contribution pensions with investment choice

View project
New

Education | 2024 - 2026

Long-term outcomes of high-achieving disadvantaged children

View project
New

Welfare | 2023 - 2026

Universal Credit, good work and progression

View project
A woman is sat on the edge of a bed staring at her phone while her daughter is in the background.
In progress

Welfare | 2023 - 2025

Virtual parent support portals: a new research and practice agenda

View project
Sixth form student smiling in a classroom while a teacher helps a classmate in the row behind him

Education | 2023 - 2025

Unequal access to higher learning: can the EPQ help with levelling up?

View project
A group of neighbours walking outside in a green space

Welfare | 2023 - 2026

Just neighbourhoods? Under-representation in UK community-led planning

View project
A woman is sat on the edge of a bed staring at her phone while her daughter is in the background.
In progress

Welfare | 2023 - 2025

Virtual parent support portals: a new research and practice agenda

View project
Two little boys and a little girl, all wearing primary school uniform, work together to solve a puzzle in their classroom.
In progress

Education | 2023 - 2025

What has ‘Free School Meals’ measured and what are the implications?

View project
Teenager hugging their mother
In progress

Welfare | 2023 - 2026

The long-term effects of being a young carer

View project
Elderly woman and adult daughter out shopping
In progress

Welfare | 2023 - 2026

Connecting pensions, health and care

View project
Early years professionals playing with children
In progress

Education | 2022 - 2024

Understanding the take-up of early education entitlements

View project
Mother, father, son and daughter standing in front of their house
In progress

Welfare | 2023 - 2025

A regional regeneration index to track socioeconomic ‘Levelling Up’

View project
Two teenage male pupils study a science lesson as part of their post-16 options
In progress

Education | 2019 - 2024

Post-16 pathways: the role of peers, family background and expectations

View project
Man working on a laptop using sign language on a video call
In progress

Welfare | 2023 - 2024

Designing inclusive remote and hybrid working to support disabled workers

View project
Teenage sixth form students taking notes in a lesson
In progress

Education | 2022 - 2024

Comparing inequality and outcomes across post-16 education in the UK

View project
Children walking with their parents in the countryside
In progress

Welfare | 2022 - 2024

Children’s lives in changing places

View project
Older man working from home on a video call
In progress

Welfare | 2022 - 2023

The impact of pension auto-enrolment and COVID-19 on saving behaviours

View project
Teenage sixth form students walking into college
In progress

Education | 2022 - 2025

The long-term impact of the Education Maintenance Allowance

View project
New

Welfare | 2024 - 2027

Gypsy, Roma, Traveller Youth: mitigating exclusions using the digital?

View project
New

Welfare | 2024 - 2027

Performance Tracker 

View project
Mother wearing hijab holding her toddler son on her knee, smiling at each other
New

Welfare | 2024 - 2025

Afghan resettlement in England: outcomes and experiences 

View project
three women walking along street laughing and smiling
New

Welfare | 2023 - 2025

Revealing social capital

View project
New

Education | 2024 - 2026

Exploring academic selection and grammar schools in Northern Ireland

View project
A middle-aged man sat at home is looking at this phone while sorting pension paperwork.
New

Welfare | 2023 - 2025

Collective defined contribution pensions with investment choice

View project
New

Education | 2024 - 2026

Long-term outcomes of high-achieving disadvantaged children

View project
New

Welfare | 2023 - 2026

Universal Credit, good work and progression

View project
Three colleagues smiling and talking at work
New

Welfare | 2023 - 2026

Arthritis, work and wellbeing: a mixed methods study with policy recommendations

View project
A man driving a van at work
New

Welfare | 2023 - 2025

The PAW Trial: feasibility and acceptability of the Pain-at-Work Toolkit

View project
Two older women swimming in their local pool
New

Welfare | 2023 - 2025

The psychological, social and economic impact of musculoskeletal conditions

View project
Older woman using a tablet to make a video call
New

Welfare | 2023 - 2025

Remote osteoarthritis peer-mentorship for socioeconomically underserved people

View project
Grandparents having fun outdoors with their granddaughter, who is eating an apple and laughing: Understanding family and community vulnerabilities in transition to net zero
Reported

Welfare | 2021 - 2023

Understanding family and community vulnerabilities in transition to net zero

View project
Father and son using laptop at home
Reported

Welfare | 2021 - 2024

Developing a minimum digital living standard for households with children

View project
Side view of two female high school students in classroom working on laptops social distancing. Student in foreground is in focus and student in background is blurred
Reported

Education | 2021 - 2022

COVID-19 and disadvantage gaps in England 2020 and 2021

View project
Close up of a young girl and her father wearing protective face masks during the COVID-19 pandemic outside.
Reported

Welfare | 2021 - 2023

The Economy 2030 Inquiry: navigating a decade of change

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

Welfare | 2020 - 2021

How the COVID-19 crisis is affecting food security

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

Education | Welfare | 2020 - 2022

Growing up under COVID-19

View project
Mother carrying daughter outside their home
Reported

Welfare | 2020 - 2022

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
Reported

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
Reported

Welfare | 2020 - 2022

The impact of musculoskeletal conditions on outcomes of other illnesses

View project
A middle-aged teacher sits at her desk and helps a female student with a problem in her textbook.
Reported

Education | Welfare | 2020 - 2020

Measuring the disadvantage attainment gap in 16-19 education

View project
Reported

Welfare | 2013 - 2017

IFS Green Budget 2013 – 2016

View project
Reported

Welfare | 2013 - 2016

Data about fathers in birth cohort studies (Life 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