Research into Covid-19 and financial hardship in London

The Covid-19 pandemic has severely impacted many Londoners’ incomes as well as outgoings. Where prior to the crisis financial hardship in London had largely been characterised by low pay and in-work poverty, unprecedented economic conditions have meant more and more people have become unemployed. Due to widespread economic shutdown, the Coronavirus Job Retention Scheme (CJRS) and Self-Employment Income Support Scheme (SEISS) have attracted more than 10 million claims since March, but significant new demand also fell on the existing benefits system. London households in receipt of Universal Credit (UC) more than doubled between February and August (compared with an increase of 75% across the rest of England). There were already 2.5 times more unemployment benefit claimants in London as of May than at the beginning of the year, a steeper increase than in the rest of the country (where the number rose 2.1 times). The claimant count has continued to rise since then, now 2.7 times the number in January for London, though it has started to decrease elsewhere in the UK.
Since March 2020, the rules and operations of the welfare system have been subject to a range of reforms, intended to support people to isolate, shield and to facilitate social distancing. These include:

• Increases to the level of some benefits – claimants of Universal Credit and Working Tax Credit now receive around £20 more a week and the amount available in housing support has increased.

• Measures to facilitate social distancing and support those who need to isolate or shield – changes were made to Statutory Sick Pay, sickness and carer benefits in order to help people follow public health guidelines.

• Temporary expansion of eligibility – rules were relaxed for some groups such as prisoners on temporary release and claimants of tax credits whose employment was affected.

Most of these changes were explicitly designed to be temporary, with most currently set to continue until the Spring, and will remain under Government review in the light of the health situation.
There is currently no available evidence of the overall impact of the new economic circumstances resulting from the Covid-19 pandemic on household incomes in London, including of the extent to which new policies have helped mitigate deepening poverty levels. To fill this evidence gap, the GLA commissioned this piece of analysis.

The methodology to be used is a combination of tax-benefit microsimulation modelling, nowcasting and scenario analysis. This will allow constructing different counterfactuals with specific (enacted or hypothetical) reforms switched in turns on and off. The impact of each reform scenario will be evaluated with respect to a common baseline.
We will use UKMOD (www.microsimulation.ac.uk/ukmod), the only open-access, freely available, fully documented tax-benefit model for the UK and its constituents nations developed, maintained and updated at CeMPA. For this project we will develop a bespoke early release of the Spring 2021 model, incorporating welfare policy changes up to the end of December 2020.
Nowcasting. Survey data are typically released only with a significant delay (the most recent FRS data refer to the financial year 2018/19). This is OK as long as the economy is at or close to an equilibrium: older data can then be used in combination with more recent policy systems, with all monetary variables appropriately uprated. However, in a rapidly evolving crisis like the current one this approach is no longer enough. This is when nowcasting techniques, which allow to modify the input data of a microsimulation model in order to incorporate more up-to-date external information, come at play. For the project we will use the most up-to-date official labour market projections from the Office for Budget Responsibility (OBR), and adjust observed labour market states accordingly. Take up of Coronavirus Job Retention Scheme (CJRS) and Self Employment Income Support Scheme (SEISS) will then be calibrated to match the aggregate HMRC official statistics.
Scenario analysis. The analysis will be conducted for the four years 2021-2024, using three different OBR scenarios (upside, central and downside). Policy parameters will be uprated using published values, when available, or past trends. Monetary variables (e.g. hourly wages) will be uprated using the standard UKMOD uprating indexes (see Reis and Tasseva, 2020).
Counterfactual policy evaluation. Following the tender specifications, all policies considered will be assessed against a common baseline scenario, assuming a stable policy environment based on the last announced policies in December 2020. In the baseline and in all scenarios considered we will exclude disability benefits, to avoid attributing a financial advantage to households with disabled members in presence of significant unobserved costs associated to disability.