03How has the pandemic affected household finances?
The pandemic and the measures introduced to fight it have had two different and opposite effects on household finances
1. The pandemic has indirectly enabled people to cut their spending
Restrictions placed on shops and other activities, as well as guidance to work from home, have limited where people can spend their money, resulting in ‘forced savings’.
This is reflected in credit and debit card transactions – people in Great Britain have, on average, spent 11 per cent less since the pandemic began in March 2020, with some spending categories particularly hard hit (see Figure 3).
Patterns closely reflect changes in restrictions and, overall, the drop in spending was most acute during the first lockdown. Between March and July 2020, people in Great Britain spent, on average, 22 per cent less than they did before the pandemic. While spending was similar to pre-pandemic levels during the summer reopening, it dipped again during the second and third lockdowns.
Spending on non-essential services – for example, food and drink, health and beauty, travel and accommodation, and entertainment – fell significantly during the first lockdown to 35 per cent of pre-pandemic levels. Vehicle spending saw an even sharper drop to 29 per cent of the total before Covid-19. Although less dramatic, spending on goods – fashion and general retail – fell to 76 per cent of pre-pandemic levels.
In contrast, spending on essentials – groceries plus household bills and services – is more difficult to reduce and has actually increased slightly since the pandemic. This is, in part, due to the shift from cash to card (see Box 2 for the methodology).
Figure 3: The measures put in place to fight the pandemic have had a direct effect on spending
Box 2: Methodology
All data is sourced from a national data set of debit and credit card transactions from approximately 11 million card accounts. Information on customer origin and demography is available on a subset of customers. All customer data is strictly anonymised and aggregated to comply with GDPR and data protection requirements.
The data does not cover housing costs or cash withdrawals, so any transactions made using cash are not included. Despite this, the data is likely to provide an accurate picture of spending patterns as, throughout the pandemic, cash use has fallen, with weekly withdrawals dropping from around £2 billion per week to around £1 billion at the peak of the pandemic.7
These changes are partly down to lockdown restrictions but most likely reflect a broader shift away from cash as retailers promoted contactless card transactions. They are likely to have affected people in poorer areas the most, as they were the least likely to use cards before the pandemic.8
Some of the trends for this group presented in the report might be affected by these changes. For example, the research finds that this group has been less likely to cut spending during the pandemic. While part of this is undoubtedly true and related to the fact that more of their spending is on essentials and therefore hard to cut, the shift from cash to card might partially mask the full extent of this.
Box 3: What has happened to financial transfers during the pandemic?
Financial transfers make up a significant proportion of overall credit and debit card transactions, including approximately 20 per cent of all spending pre-pandemic.
Within this category (before Covid-19):
- Forty-two per cent of spending was ‘currency exchange’.
- Twenty-two 22 per cent was with ‘payment providers’.
- Twelve per cent was on ‘charities’.
- Other spending came under ‘government’, ‘university’, ‘personal finances’ and ‘insurance’.
This category saw a significant drop during the first lockdown and, despite gradually picking up, has remained below pre-pandemic levels. This appears to be driven by a sharp fall in currency exchange, which could be partially related to the halt in international travel.
People from different backgrounds and places have all seen some drop in spending during the pandemic. However, the extent varies a great deal between, and within, cities and large towns.
People living in cities and large towns in the South of England have reduced their spending more
The North/South divide is evident in the overall spending reduction (see Figure 4). In Reading, Cambridge and Oxford, for example, people are spending, on average, more than 15 per cent less – equal to more than seven weeks of ‘lost’ spending between March 2020 and January 2021. In contrast, those living in cities and large towns in the North and Midlands have not cut back as much and in Hull, Sunderland and Middlesbrough, it is pretty much unchanged.
Figure 4: People living in cities and large towns in the Greater South East have cut their spending the most
Within cities, people living in richer neighbourhoods have cut more than those in poorer ones
There are significant differences within cities themselves (see Figure 5). In urban areas, pandemic spending for people living in the richest neighbourhoods fell, on average, by more than 17 per cent – equivalent to eight weeks of ‘lost’ spending between March 2020 and January 2021. However, for those living in the bottom 20 per cent of neighbourhoods for income (people with a net household income below £28,300 and more likely to live in social housing), spending hardly changed, falling by 3 per cent. Those living in neighbourhoods with an average household income between these two extremes behaved in line with these trends.
These differences are down to people’s previous spending behaviours and how Covid-19 and lockdown restrictions have affected them. On average, those living in richer neighbourhoods spent twice as much as people in less affluent areas pre-pandemic. In addition, a larger share of their spending was on categories affected by restrictions (57 per cent on non-essential services, goods and vehicles, compared with 50 per cent in poorer areas). In contrast, essentials – a category that is much harder to reduce – accounted for a larger proportion of spending for people in poorer neighbourhoods before the pandemic (25 per cent versus 17 per cent in more affluent urban areas). This has offset a larger portion of reduced spending on other items than for people living in more affluent areas.
As a result, for every £1 of reduced spending in less affluent neighbourhoods, there has been a £12 cut in richer ones.
Figure 5: People living in richer neighbourhoods had more of their spending affected by the pandemic
Box 4: Spending patterns for people living in social housing
During the pandemic, areas with higher shares of social housing have been less able to cut spending. In neighbourhoods where most people own their homes or rent privately, it has fallen, on average, by 7 and 9 per cent respectively. In areas outside London with a high prevalence of social housing, spending dropped by less than 1 per cent.
This is similar to the situation in poorer neighbourhoods, as the two often overlap. Approximately a third of all social housing in the country is in the bottom 20 per cent of neighbourhoods for income, rising to 40 per cent when excluding London. While the trends discussed in this report focus mainly on income, findings can be similarly applied to neighbourhoods with a large share of people living in social housing. London is an exception, as many people in social housing live in neighbourhoods that, on a national scale, would be considered richer (see Figure 6).
Figure 6: Most social housing outside of London is in the poorest 20 per cent of neighbourhoods
2. Covid-19 has affected jobs and people’s incomes
Despite the many Government measures to support individuals, the closures and restrictions placed on businesses over the past year have meant that more than a third of the UK’s adult population has seen at least a partial drop in their income.
The 1.4 million people who have started to claim unemployment-related benefits since the beginning of the pandemic are undoubtedly among those more likely to be struggling financially. This includes people who have lost their jobs and are either in receipt of Job Seekers Allowance or the work-component of Universal Credit, which was equivalent to £75 a week in 2019-20.9
Individuals who have received help from the Government, either through the Coronavirus Job Retention Scheme or the Self-employment Income Support Scheme, have seen their incomes drop at some point since March last year. While more generous than unemployment benefits, these schemes only covered 80 per cent of individuals’ wages up to £2,500 a month, so those who benefited had less money coming in.
Once again, these people are not distributed evenly across the country, with great variation both between and within cities.
The cities and large towns where household incomes have been hardest hit by the pandemic are a mix of strong and weaker economies
Unlike the cut in spending, which follows a very clear North/South pattern, the pandemic’s effect on household incomes has a more complicated geography. Some traditionally strong economies have been hit hard, as have places that were already facing challenges.
Crawley, Slough and Northampton are the three cities and large towns that have been most reliant on Government support since March last year, with more than a third of their working age population either receiving unemployment benefits or on furlough.10 Other places most affected include Burnley, Blackpool and Leicester.
Similarly, the places that have seen the smallest drops in income are a mix of strong and weaker economies. Cambridge, Exeter and Edinburgh fall into this group, but so do Swansea, Middlesbrough and Cardiff.
Figure 7: There is no clear geography to the drop in household incomes created by the pandemic
Households in poorer neighbourhoods in most cities were more likely to see a drop in income
People living in poorer neighbourhoods were not only less likely to cut their spending, they were more likely to experience a fall in income (see Figure 8). Although data on the take-up of the Coronavirus Job Retention Scheme is not available at this level, data on claimant count is. This can be helpful in understanding the likelihood of a reduction in income in different neighbourhoods, although it cannot show the extent (see box 5 for more details). It is therefore possible to see that, with the exception of four places, since March last year people living in the bottom quintile for income were twice as likely to have experienced a drop than those in more affluent neighbourhoods.
Figure 8: People living in poorer neighbourhoods were more likely to see a drop in income
Box 5: Using changes in claimant count as a proxy for income drops at the neighbourhood level
There is no official measure that shows how large the drops in income have been at a neighbourhood level since the pandemic began. However, one way to dig deeper into what has happened in urban areas is to use labour market indicators as a proxy. People who have started claiming unemployment-related benefits since March last year, and those who have benefited from the Government’s Coronavirus Job Retention Scheme or Self-employment Income Support Scheme, have seen their income reduced to some extent.
Places with a higher percentage point increase in claimant count are more likely to witness a greater take-up of these schemes (see Figure 9). This suggests the variation in claimant count since the pandemic began for people in different neighbourhoods can be used as a proxy to identify which individuals are more likely to have experienced a drop in income.11
While this approach allows estimates to be made about the number of people whose income has likely been affected, there is no way to capture the extent of the reduction for different people. For those already at the bottom end of the labour market, claiming unemployment-related benefits is likely to mean a smaller income drop than for individuals on a higher salary. Similarly, those earning more will experience a smaller reduction if they are furloughed than if they lose their job and have to rely on Universal Credit.
There are many more people who have seen a sharp drop in income but do not qualify for support. This includes individuals who have lost their jobs but, for example, live with a partner who is still working or have too much in savings.
However, this remains the most accurate way to estimate changes in income at such a granular level.
Figure 9: Places where more people have started claiming unemployment-related benefits since the pandemic have a higher take-up of the furlough scheme
The net impact of the pandemic on household finances, and on places overall, depends on which of the two effects outlined so far is stronger, as well as the financial cushion households and places had going into this economic crisis. In this way, it is possible to estimate whether neighbourhoods have been pushed into debt because of the pandemic, or have been able to save.
Three trends are evident for the UK’s largest cities and towns.
1. In every urban area, there are pandemic winners and losers
On average, the pandemic has indirectly enabled people living in richer neighbourhoods to save while it has likely pushed people in less affluent areas into debt. These patterns are consistent across urban areas.
Figure 10 illustrates this by displaying two points for each city, one representing the richest neighbourhoods and another showing the poorest. People in richer neighbourhoods are mostly clustered in the bottom left quadrant, suggesting they have been less likely to see a drop in their income while experiencing a large reduction in spending. Those in poor neighbourhoods tend to be in the top right corner – their level of spending has stayed pretty much the same since the start of the pandemic, but they are more likely to have experienced a fall in income. This, coupled with the fact they most likely had a smaller financial cushion beforehand, suggests they may be struggling financially.
A few exceptions can be seen in the top left and bottom right corners of Figure 9. Individuals living in a small number of poorer neighbourhoods, such as Mansfield, Hull and Wigan, are likely to have experienced little financial change in their spending or income. In a handful of places, people from both rich and poor neighbourhoods have seen large decreases in spending plus a high chance of a drop in income. These places are Crawley, Luton and Slough, where the collapse of the international travel industry has likely affected people across the entire income spectrum, and London, where poor and rich people are more likely to live side by side, making it harder to isolate the effects of the pandemic on different groups. Box 7 describes the experience of four different cities and large towns in more detail.
Figure 10: People living in poorer neighbourhoods are more likely to have been pushed into debt, while people in richer neighbourhoods are more likely to have saved
Box 6: How have people living in social housing been financially impacted by the pandemic?
Urban neighbourhoods with a greater number of people living in social housing are among the places where individuals have been more likely to struggle financially because of the pandemic.
Almost-three quarters of these fall in the top right quadrant of Figure 10. People in these neighbourhoods have maintained their level of spending despite being more likely to experience a drop in income and having a smaller financial cushion going into the pandemic.
This is, once again, consistent across the country. Neighbourhoods with high concentrations of social housing in cities and large towns in the North and the South are likely to have been hit in a similar way.
Box 7: A tale of four cities — the experience in Liverpool, Milton Keynes, Stoke and Slough
The pandemic has been felt very differently between, and within, cities (see Figure 11).
In Liverpool, where more than 70 per cent of neighbourhoods are among the poorest in the country, almost 50 per cent are likely to have been pushed into debt because of the pandemic. Fewer than 30 per cent are estimated to have been saving over the past 15 months.
Milton Keynes has had a diametrically opposite experience. Most of its neighbourhoods are affluent and 40 per cent are estimated to have been saving throughout the pandemic, while fewer than 20 per cent are likely being pushed into debt.
In Stoke, households appear to have been less financially affected by the pandemic. Some 40 per cent of neighbourhoods have seen little variation in spending since March 2020, and are less likely to have experienced a change in income.
There is a very different situation in Slough. Despite being an affluent place, more than 90 per cent of neighbourhoods are likely to have seen a large drop in both income and spending.
Figure 11: The pandemic has had different effects both between, and within, cities
2. Cities and large towns in the South of England are more likely to have accumulated Covid-savings
The pandemic experience of people from richer neighbourhoods is consistent across urban areas. However, as more neighbourhoods in cities and large towns in the South of England are affluent, the Covid ‘wins’ of people living in these places have a much greater weight here than anywhere else in the country.
This is shown in Figure 12. The four maps represent the share of all urban neighbourhoods that fall in each of the quadrants in Figure 11. Based on this, more of those likely to have amassed savings are in cities and large towns in the South of England. This includes Exeter, Aldershot and Reading, where at least two in every three neighbourhoods (66 per cent) fall into this category. In Hull, Blackpool and Barnsley, less than one in every four neighbourhoods (24 per cent) are in this group. However, there are exceptions. Almost four-fifths (79 per cent) of neighbourhoods in York are likely to have saved, while less than a fifth (17 per cent) of those in Brighton are likely to have done so.
Figure 12: A greater share of neighbourhoods in the South are likely to have amassed savings while more neighbourhoods in the North and Midlands are likely to have fallen into debt
3. In cities and large towns in the North and Midlands, a greater number of people are more likely to have been pushed into debt
Poorer neighbourhoods are unevenly distributed across the country, meaning more of those that are likely to have been pushed into debt are in cities and large towns in the North of England and the Midlands (see Figure 12). In Hull, Bradford and Liverpool, around one in every two neighbourhoods is likely to have been pushed into debt. However, in the South, this is the case for less than 3 per cent of those in Exeter, Southend and Reading. Again, there are exceptions, with very few neighbourhoods in York likely to have gone into debt.
These differences matter as they are likely to affect the ability of different places to bounce back. This is the focus of the next section.