Like other countries around the world, the impact of COVID-19 on poverty in the U.K. was substantial. The country witnessed its largest drop in GDP ever recorded during the second quarter of 2020 at a decrease of 20.4%. Comparatively, it was not quite as severe as the 31.7% drop in U.S. GDP during the same quarter, yet still larger than the 7.3% decline in GDP that occurred in India.

COVID-19 Response

The implementation of lockdowns essentially brought the economy to a halt. This means both less production and less consumption as citizens’ livelihoods suddenly changed. As a countermeasure to the subsequent decrease in GDP, the U.K. government was very liberal in its financial aid toward its citizens, corporations and national health care. Financial aid programs that the government implemented aimed to protect businesses and workers in hopes of avoiding massive closures and unemployment. These programs were especially important to keep those in lower-income brackets afloat financially as citizens relied heavily on work to support themselves and their families. A core strategy of the U.K. government was to focus aid allocation toward businesses so they could continue to support their employees who were reliant on work in an effort to reduce the impact of COVID-19 on poverty in the U.K. as much as possible.

Rising Inflation and Increased Interest Rates

These programs helped ease the economic burden on its population, yet now the government must come to terms with rising inflation as a result of increased borrowing and reduced interest rates. The Bank of England reduced interest rates to 0.1% at the beginning of the pandemic to increase borrowing ability. At the end of 2021, The Bank of England finally raised interest rates once again and has steadily increased the rates in the months since.

Tackling inflation is now the primary focus of the U.K. The British pound has followed the trend of other global reserve currencies with a steep increase in inflation. Like the U.S. dollar, the British pound has severely devalued after the decreasing of interest rates by the Bank of England as a response to the unprecedented economic constraints that the COVID-19 pandemic caused. Differently, though, the U.K. government was much more proactive in its raising of interest rates compared to the U.S. government which only in April 2022 implemented rate hikes for the first time since the outbreak of the pandemic in April 2022.

Current State of Poverty in the UK

According to the Parliament’s Commons Library, as of 2021 approximately one in five people in the U.K. are in the relative low-income bracket after accounting for housing costs. This proportion has remained relatively steady pre-pandemic up until now, yet it could increase in the coming years.

During August 2021 which was the first month without comprehensive COVID-19 restrictions in the U.K., its economy saw an increase in GDP of 0.4%. This is substantial yet still not large enough to suggest a comeback/recovery. Perhaps the most noticeable impact of COVID-19 on poverty in the U.K. has been in the cost of living. Ninety-one percent of U.K. adults surveyed in April 2022 noted there has been a noticeable increase in the cost of living within the country. This increase has taken place predominantly across the food and energy sectors. In addition to inflation, this increase in the cost of living can also be due to supply constraints that have been a consequence of the war in Ukraine.

The business-friendly fiscal policies of the U.K. government initially worked but the financial toll of the pandemic has since led to many businesses failing, with the beginning of 2022 witnessing the most business closures in the U.K. since 2017. The retail sector has so far seen the largest number of failed businesses after said supply chain constraints hit them hard.

While many U.K. citizens have found themselves in a tougher financial situation, they should expect to see a short-term increase in the cost of living as the global economy continues its recovery from the pandemic while remaining optimistic about the government’s willingness to raise interest rates to counter rising inflation.

– Devin Welsh
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