Box E: Distributional impacts of Covid-19 and potential for policy intervention

"Covid-19 was never the great leveller" (Pabst, 2020). Understanding how it exacerbated economic inequalities in the UK, and how welfare policy can counter its effects, requires a focus beyond aggregate outcomes, and on the distributional consequences, both of the shock and of policy responses to it. This Box considers a novel way to analyse the impact of Covid-19 on the consumption distribution of households. It is able clearly to outline the distributional consequences of economic shocks (like Covid-19 and Brexit) and welfare policy, specifically the Universal Credit (UC) uplift of U+00A320 per week. The proposed method is a two-step procedure where we use microsimulation in the first step to impute and simulate consumption at the household level. In the second step, we use high dimensional quantile regression to analyse the determinants of the consumption distribution. The value added of the second step is that we can compute consumption distributions for households subject to (or conditional on) living in different locations, possessing different endowments and having different demographic features (number of adults and children, ages, gender and ethnicity). This way we can analyse distributional impacts for household groups, even those for which we have only limited data. In addition, we can report estimates of uncertainty for the projected consumption quantiles.