Context
The effect of the COVID-19 crisis on the UK economy and on national levels of income has been significant. The impact of this shock on the finances of different households is likely to have varied widely according to factors such as income before the crisis and level of savings. This aim of the study was to explore the impact of the crisis on earnings, incomes and financial distress and to understand how the situation was evolving as the crisis continued.
The study
The data used in the analysis came from the Money Dashboard (MDB) budgeting app, which provides daily information on (anonymised) user finances from bank accounts, detailing the credits and expenditures from all linked-in financial accounts (current, credit card and savings accounts). The data provide information on transactions directly, and cover all sources of income (as well as expenditures, which are not examined in this report.) The sample used tracks the real-time finances of 5,684 users from May 2018 until the end of May 2020, and is reweighted to make the age and geographic profile of comparable to the UK population as a whole.
The analysis is complemented with survey-based data sources which provide the weighting criteria, contain additional information (such as how many hours people are working) and also act as a cross-check on key results. The study was conducted by the Institute for Fiscal Studies, an independent research body, to inform policy makers and the public.
Key findings
- The COVID-19 crisis had led to abrupt falls in employment, earnings and incomes by April 2020. There were no signs of a recovery in May. The crisis had, at that point, impacted the earnings of the poorest households the most.
- However, looking at total income rather than just earnings, the poorest had not fallen further behind on average. This highlights the important role of the benefits system in containing inequality and poverty.
- Non-payment of household bills increased sharply after lockdown, and increased further between April and May. In some cases, these unpaid bills were important and sensible ways of weathering the storm (for example, mortgage holidays) – but they still meant additional debt that would be carried forward.
- Over the longer term, the report concludes that there are good reasons to worry most about the economic legacy of this crisis on the worst off.
Points to consider
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Methodological strengths/weaknesses: One of the primary limitations is that MDB users have chosen to use a budgeting app to manage their finances and, as such, are not a random sample of the UK population. However the authors have taken great pains to make the analysis as representative as possible by reweighting with reference to survey data. They state that the reweighted sample matches up well to the pre-crisis national earnings and income distributions, number of workers in different age groups, levels of financial distress, and numbers of current accounts, credit cards and savings accounts per household. They also conduct placebo analysis on the previous year’s data to ensure that any effects are due to Covid-19 not seasonal factors or long-term trends.
- The method also has some advantages. For example, the data set is more accurate than survey data, as it tracks actual transactions, rather than relying on respondents’ memories.
- The app also records exactly when transactions happen, meaning they can be located precisely relative to the timing of key developments in the crisis and in the financial circumstances of users.
- The approach taken by the authors is thorough and rigorous and the report includes detailed appendices which set out the analysis methods used, approach to representativeness and outcomes of placebo analysis, together with any issues to be aware of when interpreting the data.
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Generalisability/ transferability: The report describes the situation in the UK amongst working-age people and is unlikely to reflect the situation elsewhere as other countries had different experiences of the crisis.
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Relevance: Although the situation has moved on since this report was published in June 2020, the effect of the early days of lockdown is no doubt still being felt, and this report is still of value in understanding the impact and the likely ongoing effect of changes in income and employment.
- This report is applicable to anyone with an interest in the impact of coronavirus on household finances, such government, support agencies, policy makers, policy implementers, regulators or educators.
