Using the module materials and the extract below, discuss the evolving relationship between household debt and the economic impact related to the economic shock of Covid, with a particular focus on high- and low-income households.

Extract: Household debt and Covid

The Covid crisis has been unique in the UK's recent history. The spread of Covid and the actions taken to contain it have had a large economic impact on UK households. Mitigating policies included the Coronavirus Job Retention Scheme (furlough), business rates holidays, the Bounce Back Loan Scheme and the reduction of the Bank of England base rate. However, despite this degree of public policy support, the crisis has hit incomes and employment opportunities.

But the share of households reporting being in financial difficulty has started to increase, particularly for households with unsecured loans - who tend to have lower incomes and are less likely to be in employment. These households are also less likely to have savings and have been less able to accumulate savings through the Covid crisis. This may make this subset of households more vulnerable to future shocks.

There are a number of ways that households with debt might respond to increased pressure on their finances. This includes cutting back on spending, drawing down savings, or falling into arrears on debt or other household bills. Further cuts in spending, particularly if severe, could amplify the downturn or drag on the recovery and present risks to financial stability.

So far, there is no evidence that higher levels of mortgage debt have amplified spending cuts during the crisis.

Our survey evidence suggests that, in response to a fall in income, those with unsecured debt were more likely to use savings through the crisis or take on additional debt, whereas those with mortgages were more likely to cut their spending. This may reflect the fact that mortgage borrowers are concentrated in higher income brackets, and are therefore likely to have a higher share of discretionary spending, which was more restricted by lockdown measures.

The extent to which household debt may yet play a bigger role in the Covid crisis will depend on the evolution of the pandemic and the resulting pace of economic recovery, which remain uncertain. It will also depend on how governments, households, businesses and financial markets respond to these developments.

Source: Adapted from Bank of England (2021)